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Disposable Income
- How to work it out -
Your disposable income is required if you want to reduce payments to your creditors when you can no longer afford the normal contractual payments.
Debt management companies use your disposable to work out what you can genuinely afford to repay your creditor commitments. Below we have explained how to work out your disposable income for yourself should 
you need to reduce your debts without contacting a debt management company - that being said we would imagine a debt management company would get a better response from your creditors as they are under no obligation to accept any new payment arrangements and putting this to them through a debt management company will normally yield better results.
Work out your income
You will need to work out your income on a monthly basis as most creditors will prefer to have regular monthly payments. The key to working out your income is not to take the lowest or highest amounts you may get each month but rather an average of what your normal take home pay would be.
This can be easily done by adding up your last 6 or 12 wage slips and diving the total by the number of wage slips you added together. For example if you added together your take home pay for the last six months you would divide the total amount by 6 to give a normal monthly average of your take home pay.
Work out your committed outgoings
Your committed outgoings are what you need to pay each month. These include a number of things, the most common are listed below
- mortgage or rent
- Council Tax
- Electric, Gas and other utility bills
- Telephone
- Car expenses
- Work travel
- School fees (school dinners, kids travel to school)
- Food
- Clothing
- Pet allowances
- Priority debts
This is not an exhaustive list but the main things to be considered are listed above, we have a page on priority debts which should help you understand how to these should be handled. With things like your phone bill or water bill which you may be paying quarterly simply divide your normal quarterly bill by 4 to get a monthly allowance.
After you have added all these together, which will ensure you have made allowances for the essential living costs we can deduct this from your monthly take home pay.
What's left is your disposable income and is what you can genuinely afford to pay your creditors.
What amount of my disposable income should my creditors get?
Your disposable income should be spread around your creditors on the basis that whoever you owe the most to get paid the most. This is normally referred to as payment pro-rata, which can be worked out as follows.
Example:
Owing a total of £10,000 to 3 creditors with a disposable income of £200.
Creditor A £5,000
Creditor B £3,000
Creditor C £2,000
Total owed £10,000
First we need to work out what percentage of the total debts you owe to each creditor. To do this you would simply take the amount owed to the creditor, divide by the total owed and multiply by 100.
Creditor A= £5,000 ÷ £10,000 (total owed) * 100 = 50%
Creditor B= £3,000 ÷ £10,000 (total owed) * 100 = 30%
Creditor C= £2,000 ÷ £10,000 (total owed) * 100 = 20%
We then apply these percentages to your disposable income as follows.
Disposable income is £200
Creditor A
£200 ÷ 100 * 50 = £100
Creditor B
£200 ÷ 100 * 30 = £60
Creditor B
£200 ÷ 100 * 20 = £40
Doing things this way means each creditor would receive a payment based on the percentage of how much you owe them and how much you can afford to pay which is the fairest way of spreading your disposable income around your creditors.
If you require further help, information or assistance contact us today.
