Bankruptcy trustees understand that everyone’s financial situation is different. That’s why the requirements for completing a Chapter 13 repayment plan are specific to each individual who files. The “best effort” requirement demands that each debtor tries as hard as possible to repay creditors during the bankruptcy repayment period. The ‘reward,’ so to speak, for this effort is having the remaining non-priority, unsecured debt eliminated at the end of this period.
How Your “Best Effort” Is Quantified
The bankruptcy trustee must approve your Chapter 13 repayment plan when you file. This will depend on whether the repayment plan proposed by your lawyer meets the “best effort” requirement. If you meet the state median income, the plan must show that all disposable income goes directly to paying unsecured creditors in order to meet the “best effort” requirement. Unsecured debt includes unpaid credit card and medical bills, as well as personal loans.
Do You Meet the Median Income in Ohio?
How much you will pay toward unsecured debt will depend on whether your income is above or below the state median. The state median for Ohio is based on the most recent U.S. census data. To find out if you meet this minimum, you should take your average your monthly income over the last six months. Be sure to only include the months prior to filing for bankruptcy. Then, compare this amount to the median income (for households with the same number of people) in Ohio.
To file for Chapter 13 bankruptcy, you will need to fill out a Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income – Form 22C. This will definitively decide if your average income is above or below the state median.
If You Meet the Median – How Disposable Income is Calculated
Once you have established that your monthly income is equal to or greater than the median in your state, it’s time to calculate your disposable income. Use the diagram below as a simplified reference for how disposable income is calculated in Chapter 13 cases. To meet the best effort requirement, you will have to allocate all the disposable income left in the red circle to making payments on the unsecured debt.
For the entire repayment period, you will have to continue making your best effort in order to have the remaining debt discharged. Your monthly disposable income is the minimum that you will have to pay toward nonpriority unsecured creditors over the full five-year period.
If You Don’t Meet the Median
Don’t worry, you can still file for bankruptcy. In the case that your average monthly income is below the median in your state, your repayment plan will not be based on disposable income (as calculated above). Instead, your plan will include a personalized budget. This budget will establish best effort payments. Even if this budget leaves little or no amount for paying off nonpriority unsecured debt, the Chapter 13 plan can be confirmed.
After the plan has been confirmed, the debtor must continue to make the required payments and the set best effort payments in order complete Chapter 13 repayment. Remaining nonpriority unsecured debt can be discharged once the repayment period has been completed. The period should last three years in these cases.
How Long Will the Chapter 13 Repayment Plan Last?
It’s also important to know that, federal law dictates that someone with an income below the state median for households of the same size will have a repayment plan that must last at least three years. If your average monthly income exceeds the median, repayment will typically last five-years.
What If My Income Changes During that Time?
You are expected to be honest and transparent about your assets, property and income. You must report any changes in your income or other financial aspects that occur during the bankruptcy repayment period. Consult with your attorney if this happens.
How Are Assets Affected in Chapter 13 Bankruptcy?
Unlike Chapter 7 bankruptcy, you will not be required to liquidate your assets. The main advantage of filing for Chapter 13 bankruptcy is that the debt is paid down using disposable income without needing to sell off assets. The exception to this is if you own a significant amount of property.
DO YOU QUALIFY FOR CHAPTER 13 BANKRUPTCY?
Not everyone who struggles with debt can file for Chapter 13 bankruptcy. Consult with an experienced professional who can explain your options and help you find the best solution to your financial situation.
Contact Amourgis & Associates for advice you can trust; call (844) 218-2721.