In order to be confirmed (approved) by the court, your Chapter 13 repayment plan must represent your "best effort" at paying back your nonpriority unsecured creditors. This generally means that you must pay all of your disposable income into your Chapter 13 plan. (For this reason, this is also called the disposable income test.) Read on to learn more about the best effort requirement in Chapter 13 bankruptcy.
(For more on how Chapter 13 works, see our Chapter 13 Bankruptcy area.)
What Is the Best Effort Requirement in Chapter 13 Bankruptcy?
When you file for Chapter 13 bankruptcy, you propose a plan to pay back your creditors. Your repayment plan has to be approved by the court before it can be finalized. After you file your plan, the court and the trustee review it to make sure it complies with all bankruptcy laws and requirements. (To learn more, see The Chapter 13 Repayment Plan.)
One such requirement is that all of your disposable income must be used to pay nonpriority unsecured creditors (such as credit card companies) in your plan. This is referred to as the best effort requirement or the “best efforts test.”
How Is Your Best Effort Measured?
As part of your bankruptcy petition, you must complete Form 22C, the" Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income." This form is very similar to the Chapter 7 means test form and is sometimes referred to as the Chapter 13 means test. However, instead of determining if you qualify for Chapter 7 bankruptcy, it determines how much you should be paying nonpriority unsecured creditors through your Chapter 13 plan based on your monthly disposable income. (For more on Form 22C, see Form 22C in Chapter 13 Bankruptcy.)
How Much Do You Have to Pay Nonpriority Unsecured Creditors?
When completing the Chapter 13 means test, you must provide your average monthly income for the six-month period prior to filing for bankruptcy. You then compare your average income against the median state income for a household of the same size. How much you must pay nonpriority unsecured creditors depends on whether your income is above or below the state median.
If You Have Below Median Income
If your income is below the state median, you are not required to complete the entire means test form. As a result, a monthly disposable income figure is not calculated. Essentially, if you are below median, the court assumes that you have no disposable income and your plan payment is primarily based on your budget. This means that the bankruptcy court will usually approve your Chapter 13 plan even if you are paying little or nothing to your nonpriority unsecured creditors. In addition, your plan can be only three years long instead of five.
Example. Brian is single and makes $35,000 a year. The median income for a single person household is $45,000 in his state. Since Brian’s income is below median, he does not have to complete the entire means test form and may end up paying nothing to nonpriority unsecured creditors.
If Your Income Is Above the State Median
You must complete the entire means test form if your income is above the state median. To calculate your monthly disposable income, the means test uses national and local standards for most living expenses. However, you are also allowed to deduct your actual expenses for certain items such as your mortgage, taxes, and health insurance. If you have a positive monthly disposable income figure, you multiply it by 60 to figure out how much you must pay nonpriority unsecured creditors in your plan. This is because above median debtors are required to be in a five-year bankruptcy plan.
Example. Emily and Brad are married and have a combined annual income of $90,000. Their state has a median income of $60,000 for a household of two. After completing the means test, their monthly disposable income is determined to be $500. Since they have to be in a five year (60 month) bankruptcy plan, they would have to pay nonpriority unsecured creditors at least $30,000 ($500 multiplied by 60) over the course of their Chapter 13.