The most important thing my Chapter 13 clients want to know is how much their Chapter 13 Plan payment will be. They ask this question at our initial meeting, before their case is filed, and during the period before their Chapter 13 Plan is confirmed. Of course. It is probably the most important factor in whether their case will be a success.
Determining the amount of the payment is not always easy, particularly at the very beginning of the case. While I try to give a rough estimate, events can occur during the case that can change my estimate, sometimes significantly.
There are four tests that are used to determine the amount of the Chapter 13 Plan payment:
- The Chapter 13 Means Test (officially, the “Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Calculation of Your Disposable Income”);
- The Disposable Income Test;
- The Chapter 7 Liquidation Analysis Test; and
- The Required Payments Test
The Chapter 13 Means Test was imposed in 2005, with the stated purpose of determining whether their Plan would be 3 years or 5 years long, and to have an objective way to determine the amount of the payment. It is generally viewed as a time-consuming failure that does not fairly reflect a debtor’s ability to pay. Nevertheless, this 11-page calculation is one of the established four methods of determining your Chapter 13 Plan payment, provided your household income is above your state’s median income for a comparably sized family.
The Disposable Income Test is the only one of the four test that is explicitly based on ability to pay. You first calculate your net household income and subtract from it your actual reasonable monthly expenses. The resulting number–your “excess income”–is your Chapter 13 Plan payment. You do not include in this calculation a deduction for those debts that will be paid through the Chapter 13 case, such as mortgage arrearages, tax payments, and credit card bills.
In the Chapter 7 Liquidation Analysis Test, you look at how much your general unsecured creditors (typically credit cards, medical bills and personal loans) would receive in a hypothetical Chapter 7 case. In many cases, they would receive zero, because there are no non-exempt assets with equity, and creditors would get nothing in a Chapter 7 case.
The last test is the Required Payments Test. Usually, priority debt, such as recent taxes and domestic support obligations, must be paid in full during the course of the Chapter 13 case. Mortgage and other secured debt arrears must also be paid in full, along with unpaid attorney fees, trustee commissions and (in most cases) at least a nominal amount to the general unsecured creditors. Add these payments up, and you reach the Required Payments.
After having calculated each of these numbers, you pick the highest. That is your Plan payment. At least for the moment.
Many factors during your case can change this number. The amount of Proofs of Claim, changes in disposable income or assets can all affect which test will apply and how much will need to be paid.
This is not simple. Work closely with your attorney to help him or her have the information needed to calculate the Plan payment.
Bankruptcy Law Network, LLC, 6502 S. 6th Street, Klamath Falls, OR 97603, USA