How are the payments to creditors determined in a Chapter 13 payment plan?
Four tests considered to decide the cost of Chapter 13 payments
Once the decision has been made to file bankruptcy under Chapter 13, debtors must go through a series of tests to find out how much their court-ordered payments to creditors will cost them each month.
There are four tests that will decide the final figure. First, a means test - generally viewed as the most important by legal experts – weighs a person's income minus living expenses against the average for similar households in their home state.
According to the National Association of Chapter 13 Trustees, an individual's finances for the six months prior to filing bankruptcy determines if one is an "over-median" debtor who can afford a repayment plan that lasts five years or an "under-median" debtor who isn't expected to make payments for more than three years. Sometimes, the U.S. Bankruptcy Court will consider a longer plan if that's what they need to get their financial issues under control.
Next is the Chapter 7 liquidation analysis test - the value of one's non-exempt assets and how much creditors would have received if the debtor's property had been sold in a Chapter 7 bankruptcy.
"The bankruptcy law requires that your unsecured creditors are to receive at least as much as they would get if your non-exempt assets were sold at auction, so we have to keep these figures in mind when drafting your plan," according to the Nashville law firm of Clark & Washington.
The disposable income test is based on how much money is left after living expenses are subtracted from the debtor's income. "This test comes closest to reflecting your actual ability to make the Chapter 13 plan payment," writes Maryland attorney Brett Weiss on Bankruptcy Law Network.
Finally, the required payments test figures into the monthly amount. All administrative and legal fees are paid in full through the plan, as are non-dischargeable debts such as child support, alimony and most taxes. Any back payments owed on cars and house mortgages are also included. "Add all these up, and that’s the minimum that must be paid under the plan," states Weiss.
Beyond the minimum, the plan is also expected to take care of at least a portion of the unsecured debts, including credit card and medical bills. These are usually prioritized with a certain percentage paid on each debt. Whatever unsecured bills remain when the plan finishes after three or five years is discharged by the court.