The amount that you must pay in a Chapter 13 bankruptcy case depends on several factors. Those factors include the results from the means test (more about this later), how much disposable income you have, and how much equity you have in your assets.
The Means Test
One of the changes made to the bankruptcy code in 2005 was the inclusion of a “Means Test.” The means test is theoretically designed to determine qualification for filing a Chapter 7 bankruptcy case. Additionally, it is also used to determine how long your Chapter 13 case should last. Many problems exist with the means test including the fact that it looks back 6 months prior to the filing of your case to determine how you should proceed in the future. Even with a dramatic change in circumstances before a case is being considered, a person could still be barred from filing chapter 7 due to their income in the recent past. For example, someone earning $100,000 per year but who becomes unemployed without any prospects for replacing that income could be barred under the means test from eligibility for relief under chapter 7, at least for some period of time after they became unemployed. Problems or not, we all live with this law until Congress sees fit to change it. Under the means test, your income is compared to the average income of people who live in the same county and state as you do and who have the same number of people living in their household. If your income is higher than the test allows, you could have a presumption of bad faith which would bar you from relief under chapter 7. Essentially, the means test would then leave you only eligible for relief under a different chapter, like Chapter 13.
How the Means Test Works in a Chapter 13 Bankruptcy Case
In Chapter 13, the means test dictates whether you are required to dedicate 5 years to the repayment of your debts or whether you can qualify to commit only 3 years. In Chapter 13, if your income exceeds the median income, you must dedicate 5 years or 60 times your disposable income to qualify for a discharge. In summary, if the means test shows your income to be less than the median income, you can file for a 36 month plan; if it exceeds the median income, you must dedicate 60 months. In order to reduce your payment, a 36 month debtor can optionally extend his plan to 60 months, but a 60 month debtor cannot shorten the time.
Your monthly Payment Must Equal Your Disposable Income
In bankruptcy your disposable income is different than your net income, which is your earnings less tax and other deductions withheld by your employer. In bankruptcy, disposable income is the amount of money you have left over after payment of your secured debts, your taxes, insurance, and other reasonable living expenses. The Means Test has its own method for calculating disposable income, which takes into account the government's standards of reasonable expenses. Your bankruptcy attorney will determine your monthly payment based upon whether you are required to use the means test disposable income or the standard procedure used by bankruptcy lawyers. Whichever disposable income analysis is applicable, you will be required to pay a minimum of 36 times your disposable income (if you qualify for a 36 month plan) or or 60 times your disposable income (if you can only qualify for a 60 month plan). The last possibility if based upon an amount that is equal to what creditors would receive in your case if your assets were liquidated under Chapter 7, which is called the Best Interest of Creditors Test.
Best Interest of Creditors Test
The requirement that you pay your creditors at least as much as they would receive if your case proceeded under Chapter 7 bankruptcy is called the “Best Interests of Creditors Test.” Using this test, your bankruptcy lawyer will calculate how much equity you have in your assets. Next, your bankruptcy attorney will calculate how much of that equity you can shield through the use of your exemptions. Finally, your bankruptcy lawyer will calculate how much it would cost for the case to be administered under Chapter 7. If the result of these calculations is a number greater than 36 times your disposable income (if you qualify for a 36 month plan) or 60 times your disposable income (if you are required to file a 60 month plan), your Chapter 13 payment will be based upon the net equity in your assets. The result is that you will pay either 36 or 60 times your disposable income, or an amount equal to the net equity in your assets in order to satisfy the Best Interest of Creditors Test.
Are you confused yet?
This all may sound very confusing. It can be confusing but you have the perfect solution. If you think you need to file a bankruptcy case, schedule an appointment with an experienced bankruptcy lawyer who can review your facts and circumstances. An experienced bankruptcy attorney can determine your ability to qualify for Chapter 7 and whether Chapter 7 or Chapter 13 is best for you. In addition, an experienced bankruptcy lawyer can calculate your payment if you need to file a Chapter 13.
If you are in debt and need help, call to set up an appointment for a free consultation. The initial consultation is free. You have nothing to lose and much to gain by finding out how you can get out of debt and live a better life.
For more information on how much your Chapter 13 payment will be, check out my post discussing an example of how Chapter 13 can help you reduce what you owe.