What is the Best Effort Requirement of Chapter 13?
The bankruptcy trustee is appointed following the filing of the repayment plan. The trustee and your creditors will review your proposed repayment plan to ensure that it satisfies all bankruptcy requirements. Before being finalized, your repayment plan must also be approved (confirmed) by the court.
Paying your disposable income to nonpriority unsecured creditors (such as credit card companies) in your repayment plan will demonstrate that you are making every effort to repay your debts. After deducting allowed living expenses and mandatory payments, such as secured and priority debt payments, your disposable income is the amount remaining. (Secured debts are backed by collateral, such as a mortgage or an automobile loan. Priority debts are those that warrant advancement to the front of the payment queue. Examples include domestic support obligations and tax debt.)
You will apply your discretionary income to your remaining debt (nonpriority unsecured debt, like credit card balances and medical bills).
What Will I Pay Unsecured Nonpriority Creditors?
- Using the Chapter 13 Calculation of Your Disposable Income form, you will subtract the following from your income to determine your disposable income:
- Expenses for living based on national and regional norms, as well as some actual amounts
- secured payments, such as mortgage or auto loan payments (and any delinquent payments), and
- Priority debts include arrears on child support and certain tax debts.
- Over the course of five years, you will be required to pay a minimum of your monthly disposable income to your non-priority unsecured creditors.
Why Will I Be Charged More If I Own a Large Property?
The analysis continues further. In determining whether to confirm your repayment plan, the judge will also consider whether your creditors will receive the same amount through your Chapter 13 plan as they would if you filed for Chapter 7 bankruptcy.
Here is why this is important:
In Chapter 7 bankruptcy, the trustee sells all nonexempt assets (those that are not protected by exemptions). The funds are allocated first to the priority creditors, and then, if anything remains, to the non-priority unsecured creditors.
- Chapter 13 bankruptcy, on the other hand, allows you to keep non-exempt property. However, your creditors will not permit you to receive a windfall. To ensure that your creditors receive the same amount as they would under Chapter 7, you must pay the greater of:
- the sum of your total priority debt and your disposable income, or
- the market value of your taxable property.
Except: If You Were Eligible for Chapter 7
If you qualify for Chapter 7 but file for Chapter 13 for another reason, such as to save your home, you will not be required to calculate a monthly disposable income figure. Your plan payment will be based on your financial situation. The bankruptcy court will typically approve your Chapter 13 plan even if you’re paying non-priority unsecured creditors little or nothing. Additionally, the duration of your plan is reduced from five to three years.