"Best Effort" Requirement in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, your repayment plan must represent your "best effort" at paying back your nonpriority unsecured creditors.

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.

What’s the Chapter 13 Best Effort Requirement?

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).

What Will I Pay Nonpriority Unsecured Creditors?

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.

If Your Income Is Below the State Median

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”).

If Your Income Is Above the State Median

Using the Chapter 13 Calculation of Your Disposable Income form, you’ll calculate your disposable income by deducting the following from your income:

  • living expenses using national and local standards, as well as some actual amounts
  • secured payments, such as mortgage or car payments (and any arrearages), and
  • priority debts, such as past due domestic support obligations and some tax debt.

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.

Why Will I Pay More If I Own Significant Property?

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:

  • your total amount of priority debt plus your disposable income, or
  • the value of your nonexempt property.

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:

  • $17,000 ($5,000 priority debt plus her monthly disposable income of $200 times 60), or
  • $150,000 (the value of her nonexempt property ($2,500 per month for 60 months).

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.

Talk to a Bankruptcy Lawyer

Need professional help? Start here.

How it Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you
NEED PROFESSIONAL HELP ?

Get debt relief now.

We've helped 205 clients find attorneys today.

How It Works

  1. Briefly tell us about your case
  2. Provide your contact information
  3. Choose attorneys to contact you