Before the court will confirm (approve) your Chapter 13 repayment plan, you must show that your payment represents your "best effort" at paying back creditors. It’s also called the disposable income test because you must demonstrate that you’re paying all of your disposable income into your Chapter 13 plan.
Read on to learn more about calculating your disposable income and the best effort requirement in Chapter 13 bankruptcy.
After you file your repayment plan, the bankruptcy trustee appointed to administer the case and your creditors will review it to make sure it complies with all bankruptcy laws and requirements. Your repayment plan must be approved (confirmed) by the court before finalized.
You’ll show that you are using your best effort to repay creditors if you’re paying your disposable income (or more) to nonpriority unsecured creditors (such as credit card companies) in your plan. Your disposable income is the amount that remains after deducting allowed living expenses and mandatory payments, such as secured and priority debt payments.
(Secured debts are guaranteed by collateral, such as a mortgage or car payment. Priority debts are those that are sufficiently important to move to the front of the payment line. Examples include domestic support obligations and tax debt.)
You’ll pay your disposable income toward your remaining debt (nonpriority unsecured debt, like credit card balances and medical bills).
When completing the Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period form, you’ll provide your average monthly income for the six-month period before filing for bankruptcy. You’ll then compare your average income against the median state income for a household of the same size.
How much you’ll pay nonpriority unsecured creditors will depend on whether your income is above or below the state median. You’ll find your state’s most recent median income figures on the U.S. Trustee’s website. Select “Means Testing Information” from the left navbar.
You won’t be required to calculate a monthly disposable income figure. Your plan payment will be based on your budget. The bankruptcy court will usually approve your Chapter 13 plan even if your’e paying little or nothing to your nonpriority unsecured creditors. Also, your plan can be only three years long instead of five.
Example. Cody is single and makes $35,000 a year. The median income for a single person household is $45,000 in his state. Since Cody’s income is below the median, he doesn’t have to calculate his disposable income and might end up paying nothing to nonpriority unsecured creditors (known as a “zero percent plan”).
Using the Chapter 13 Calculation of Your Disposable Income form, you’ll calculate your disposable income by deducting the following from your income:
The amount of disposable income that you have each month is the minimum you’ll have to pay to your nonpriority unsecured creditors over five years.
Example. Amara and Theo 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 disposable income calculation, they learn that their monthly disposable income is $500. Since they have to be in a 60-month bankruptcy plan, they’ll have to pay nonpriority unsecured creditors at least $30,000 ($500 multiplied by 60) over the course of their Chapter 13 plan.
The analysis doesn’t stop there. When deciding whether to confirm your repayment plan, the judge will look at another factor—whether your creditors are getting as much through your Chapter 13 plan as they would if you filed for Chapter 7 bankruptcy.
Here’s why this matters.
In Chapter 7 bankruptcy, the trustee sells all nonexempt property (assets that you can’t protect with a bankruptcy exemption). The funds get used to pay priority creditors first, and then, if anything remains, are divided among the nonpriority unsecured creditors.
By contrast, you’ll get to keep nonexempt property in Chapter 13 bankruptcy. But, your creditors aren’t going to allow you to get a windfall. To ensure your creditors receive as much as they would in Chapter 7, you must pay the greater of the following:
Example. Charlotte doesn’t make much money, but she owns a significant amount of property. Her disposable income is $200 per month. The house she inherited from her grandmother has $150,000 of nonexempt equity in it (the amount she’d lose in a Chapter 7 case). She also owes $5,000 in tax debt. Charlotte must pay the greater of:
Because of her relatively low income, it’s unlikely that she’d be able to support a confirmable Chapter 13 repayment plan. You’ll find more information about this aspect of the repayment plan calculation, along with helpful examples, in Exemptions in Chapter 13 Bankruptcy.