In Chapter 13 a debtor makes monthly payments to the Chapter 13 trustee rather than have the Chapter 7 trustee liquidate her non-exempt property. The question often comes up “what will my Chapter 13 payment be?” The short answer is, we won’t know until we run the numbers. Calculating a Chapter 13 monthly payment is a complicated and often time-consuming exercise. The only thing that can be said for sure is, there is no “typical” payment.
Chapter 13 uses a concept called disposable monthly income, or DMI. The calculation of DMI is different depending on whether a debtor is a below-median or above-median debtor.
For a below-median debtor, DMI is the difference between all monthly income from whatever sources; and all monthly 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 must be a positive number, that is, income has to exceed these monthly living expenses. If it doesn’t, a debtor has no disposable income and a Chapter 13 plan will not be feasible.
For above-median debtors, the calculation is more complex. In this case, a debtor must use the Means Test, or Calculation of Disposable Monthly Income. This form tells a debtor what expenses are allowed by using IRS living standards. Oftentimes the calculated DMI bears no resemblance to how much money the debtor actually has available after paying her real expenses. In that case, too bad. Unless the debtor in an above-median case can pay the calculated DMI to her unsecured creditors, her plan is not feasible. Sometimes it happens that the calculated DMI is a negative number. In that case, the Chapter 13 plan payment is calculated in the same manner as the plan payment is calculated for a below-median debtor.
Applicable Commitment Period
The applicable commitment period is the length of time a debtor is required pay her disposable income to the trustee. For a “below-median” debtor, meaning annual income is less than the median income for a family of the same size in the debtor’s community, the applicable commitment period is three years, but can be as long as five. For an “above-median” debtor, meaning annual income is above the median, the applicable commitment period is five years. If a debtor can repay all her creditors in full in less than three or five years, depending on the applicable commitment period, the plan will end early.
There is one more factor that goes into determining what payments are. That is the “required return” to unsecured creditors. To determine this the court looks at what unsecured creditors would recover if the debtor were in Chapter 7. Whatever that is must be paid, at the least, through the Chapter 13. Here’s how it works. Suppose the value of all non-exempt property, after payment of secured claims (mortgage, car loans, etc.) is $5,000. Unsecured creditors would share that $5,000 in Chapter 7. Therefore, the Chapter 13 plan must repay at least $5,000 to unsecured creditors. If DMI multiplied by the number of months in the applicable commitment period isn’t enough to repay this amount, the 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 the DMI for the applicable commitment period.
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