Most of the time people think that the best way out of debt is to file for bankruptcy. They are quick to think that their appeal for bankruptcy will be approved no matter what their financial condition is.

However, there are some tests that individuals must go through before they are granted bankruptcy. This is one way the government gets to protect companies that have accepted the loan request of individuals. If bankrupt is always approved, then individuals will keep on filing for bankruptcy when they are unable to pay off their debt.

Individuals who file for bankruptcy need to go through a Means Test. This Means Test was created by Congress in 2005, as a reformation of the Bankruptcy Code. One vital component of this test is to calculate the individual’s current monthly income in order to determine if the person has disposable income.

As such, the basis of determining whether or not the individual is truly bankrupt depends on the amount of money he brings in each month.

What is Disposable Income?

In theory, disposable income refers to the amount of money an individual can use to pay back his debts on a monthly basis. If creditors determine that the individual has disposable income, then he cannot file for bankruptcy without paying for anything. The income will still be used for paying off creditors in a Chapter 13 bankruptcy case. When this is done, a Chapter 7 bankruptcy will no longer be filed.

What’s Included in a Disposable Income?

There are a number of income sources which can be considered as disposable income. Knowing these can help individuals determine whether or not they still have disposable income enough to pay off their debt and avoid filing for a complicated bankruptcy case.

Considering that there is a six month period, the individual will need to declare the earnings he earned or received as an income. This includes the following:

• Wages
• Self-Employment Income
• Tips
• Income from Operation of Business or Farm
• Family Support
• Alimony
• Retirement
• Pension Income

In addition to this, the money an individual gets from uncommon sources is also considered disposable income. These includes rental income, food stamps, interest, dividends, sale of stocks, retirement account withdrawals, royalties, income from trust accounts and life insurance income.

How Disposable Income Affects Bankruptcy?

As a generalization, the money that an individual earns or receives during a six month period prior to his bankruptcy case needs to be included in the test. No matter where the money comes from, it can be considered as the individual’s income. It can either be from self-employment or employment under another company. The earnings will then be put together in order to produce an average amount.

The reason why disposable income needs to be determined when filing for bankruptcy is because it will help decide what particular type of bankruptcy case to file.

This is why the Means Test is a complicated process that is specific to each case since it depends on the individual’s sources of income and some specific facts related to the case.

It is really recommended to see an attorney who can help you during the bankruptcy case. This can make the entire process much easier to deal with, considering there will be a lot of legalities that need to be considered. As such, it is best to hire an attorney who has a fair share of experience in handling bankruptcy cases; especially those that involve the use of disposable income to pay off one’s debt.

Have you ever had to file for bankruptcy before?

Author Bio: YFS is owner and author of Your Finances Simplified. He was born and raised in West Philadelphia and is now a financial adviser, IT contractor, landlord, and treasurer of a non-profit. He created his blog partly due to his desire to help people with their finances.