This is one of the questions I encounter most frequently during my consultations with prospective new clients. While some people realize that Chapter 13 involves a payment plan, most don’t fully understand how either the commitment period or the monthly repayment figure is calculated. Many believe that the repayment is based on how much debt they have. Others are under the impression that their repayment is contingent upon the outcome of our negotiations with their bankruptcy creditors. In fact, neither one of these beliefs is accurate.
To begin with, the required length of the repayment plan can be anywhere from 3-5 years. If your household income is below the median income for your state, you have the option of a 36 month, or 3 year Chapter 13 plan. (Note that some below-median income debtors choose nonetheless to have a 5 year plan to reduce their payments). Above-median income debtors are required to propose a 60 month, or 5 year repayment period, unless they can pay back all of their debts in a shorter period of time.
The amount of repayment is determined using the highest figure as calculated by three tests: CMI, I-J, and Liquidation Test. CMI, or Current Monthly Income, is a misnomer, as it does not always reflect the actual current monthly income of the debtor. Instead, CMI analyzes the last six months of income prior to the bankruptcy filing. This income is then offset by certain expenses, governed in part by IRS local standards for same-sized households. The net disposable income as calculated on this schedule is committed to the monthly Chapter 13 plan for repayment purposes.
“I-J” refers to two different bankruptcy schedules: Schedule I (income) and Schedule J (expenses). This test differs from CMI in several important ways. First, while CMI considers only the last six months of income, Schedule I is forward-looking. Second, debtors can list their actual monthly expenses instead of IRS local standards, provided the expenses are reasonable. Examples of non-CMI expenses listed on J might be: gym memberships; baby diapers; vitamins; personal care products; pet food and veterinary expenses; work lunches; and even security alarm monitoring for your home. Once income from all sources is listed on Schedule I, we subtract all allowable expenses listed on Schedule J, leaving a net disposable income figure. This is the Chapter 13 repayment amount as determined by this test.
Finally, we have the test commonly referred to as the Liquidation Test. To calculate the Liquidation Test amount, we add up the value of all assets of the debtor. From that figure, we subtract all available bankruptcy exemptions. The “over-exempt” amount is the result of the liquidation test. Over the course of the 36 or 60 month Chapter 13 plan, debtors must repay a minimum of this over-exempt figure to their unsecured creditors.
Of course, there are many intricacies well beyond the scope of this article that may affect how much debtors will need to repay in Chapter 13. That’s why it is highly recommended that debtors consult with a qualified bankruptcy attorney before making any decisions regarding filing for Chapter 13 bankruptcy.