In Chapter 13 you make monthly payments to the Chapter 13 trustee rather than have the Chapter 7 trustee liquidate your non-exempt property. The question often comes up “what will my Chapter 13 payment be?”
Chapter 13 uses a concept called “disposable income.” This is the difference between all of your monthly income from whatever sources and all of your living expenses, such as rent or mortgage payments; utilities; food; clothing; medical expenses; transportation (car payments and gas, oil and maintenance); insurance; charitable contributions and the like. This difference has to be a positive number, that is, your income has to exceed these monthly living expenses. If it doesn’t, you have no disposable income and your plan will likely not be feasible.
Applicable Commitment Period
The applicable commitment period is the length of time you have to pay your disposable income to the trustee. If you are a “below-median” debtor, meaning your annual income is less than the median income for a family of your size in your community, the applicable commitment period is three years, but can be as long as five. If you are an “above-median” debtor, meaning your annual income is above the median, the applicable commitment period is five years.
There is one more factor that goes into what your payments are. That is the “required return” to unsecured creditors. To determine this the court looks at what unsecured creditors would recover if you were in Chapter 7. Whatever that is, you must pay at least that amount in Chapter 13. Here’s how it works. Suppose the value of your non-exempt property, after payment of secured claims (mortgage, car loans, etc.) is $5,000. Your unsecured creditors would share that $5,000 in Chapter 7. Therefore your Chapter 13 plan must repay at least $5,000 to unsecured creditors. If your disposable income multiplied by the number of months in the applicable commitment period isn’t enough to repay this amount, your plan can’t be confirmed.
In many cases the required return is zero because the debtor has no non-exempt property that could be sold in Chapter 7. In that case there is no requirement to pay a minimum amount to unsecured creditors and the only obligation is to pay your disposable income for the applicable commitment period.