When filing for bankruptcy under Chapter 13, you will need to seek court approval for your repayment plan. Part of getting your Chapter 13 repayment plan approved involves proving that the plan is your “best effort” at paying your debts. To be your best effort, the plan must provide for paying all of your disposable income to non-priority unsecured creditors. Disposable income includes any funds left once you have covered your necessary living expenses and any payments on secured debts and priority debts. Secured debts are tied to a specific asset, while priority debts are certain types of debts that are especially important, such as child support and taxes. By contrast, non-priority unsecured debts often consist of credit card debts and any payments that you owe to health care providers.
Calculating Payments on Non-Priority Unsecured Debts
The main issue in determining your payments on these debts is whether your income is above or below the median income for your state. You will need to calculate your average monthly income during the six months before you filed under Chapter 13, and then you will need to compare this amount to the state median for a household of the same size as yours.
Assuming that your income is below the state median, you can probably meet the best effort requirement without paying much (or anything) on non-priority unsecured debts. This may also result in completing your Chapter 13 repayment plan in three years rather than five. Your budget will serve as the basis of your plan instead of your monthly disposable income.
Form 122C-1 is used to calculate a filer’s monthly income and commitment period. Form 122C-2 is used to calculate a filer’s disposable income.
If your income is above the state median, however, you will need to calculate your disposable income by deducting your living expenses, secured debts, and priority debts from your income. You can calculate your living expenses according to national and local standards, although you may be able to consider information specific to your expenses as well. Once you have made those three deductions from your total income, your monthly disposable income will be the remainder. The court likely will set up a five-year repayment plan that will dedicate your monthly disposable income to paying non-priority unsecured creditors.
Special Issues for Debtors With Substantial Assets
Some people who want to file under Chapter 13 may not have much income but may still own significant assets. (In this situation, they may want to reconsider whether bankruptcy is the right step for them or whether an alternative would be less disruptive and more efficient.) The court may be concerned about whether creditors would be receiving less through a Chapter 13 repayment plan than they would through the liquidation of your assets under Chapter 7. This could happen because a debtor keeps non-exempt property in Chapter 13 but not in Chapter 7.
Avoiding a Windfall
Filers with substantial assets must pay creditors the greater of:
The value of their non-exempt property; or
The total amount of their priority debt and disposable income
The court will determine the value of any non-exempt property as well as the combined amount of the debtor’s priority debt and disposable income. The debtor must pay whichever amount is greater to their creditors to avoid a windfall by filing under Chapter 13 instead of Chapter 7.