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What Is Disposable Income

28th May 2012

If you have been investigating how to deal with debts, you may have read the phrase “disposable income”. We review precisely what this term means if you intend to embark upon a Scottish trust deed, debt arrangement scheme, debt management plan, or bankruptcy.

Most debt arrangements involve a compromise being established between an individual that cannot currently afford to fully repay his or her debts (or their debts for a couple), and the creditors that they owe money to. Part of this compromise is often based upon offering to the creditors a sum of money from income each month (or sometimes each week). The creditors that are being asked for support will want to ensure that this regular payment represents a fair effort from the debtor to repay what they reasonably can.

Usually this compromise is based upon the debtor paying over their “disposable income”. Disposable income could be viewed as being the amount of cash left over after all essential bills and all reasonable expenditure have been accounted for. The disposable income is (broadly) therefore your total income minus your essential bills plus your reasonable expenditure.

If you start debt solutions such as protected trust deeds or the debt arrangement scheme, you’ll be living on a fairly restricted budget for the term of the agreement. People are generally happy to accept that, but it’s important to remember that calculating disposable income is more of an art than a science. The way one trust deed firm calculates your disposable income might be quite different to the way another firm does it. One trust deed Scotland firm may suggest a monthly payment of £300 when another thinks just £200 is the amount that you can afford.

Some things to beware of when calculating disposable income:

  • Backwards calculation. Some poor-quality advisers start from the basis of what will be required in order to make a trust deed or debt arrangement scheme viable. They amend your expenditure to make it look like a certain debt solution works, whereas in fact the budget left over will not be enough to live on (remember these solutions aren’t short in duration).
  • Agreeing to a payment you know you cannot afford. Some people are so desperate to deal with their debts that they agree to a monthly payment which is too high. Sometimes this is because the new payment will, at least, be lower than the contractual debt repayments. The end-result is that the stress of the debts is simply replaced by the stress of the trust deed payment. There is no point in replacing one problem with another.
  • Have any allowances been made for contingencies? Is there a car maintenance allowance you can save up for when a service is due? If you’re a homeowner is there any allowance for the types of small repairs that arise from time to time? If there is nothing in the budget for unpleasant surprises, the surprise will be even more unpleasant when it occurs.

If you’re about to start a trust deed or Scottish debt arrangement scheme you may well wish to consider speaking to more than one firm or adviser before committing to a particular payment each month. You may find that this adviser takes a different view on your disposable income and that this different view alters your perception on the decision that you’re about to make. The more advice you get the better as you’ll be better-placed to make an informed decision.

To discuss how much your disposable income would be calculated at if you entered a trust deed in Scotland, contact our debt advice team. After a conversation about your bills and general expenditure we’ll be able to let you know where you stand.

 

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