Your Chapter 13 Plan must meet the following four major standards in order to be approved by the Bankruptcy Court:
1. The “Chapter 7 test”
2. The “Disposable Income Test”
3. Form 22 standard
4. Feasibility standard
Chapter 7 test standard:
In a Chapter 13 case, the Bankruptcy Judge will want to know that the unsecured creditors are receiving at least as much under your Chapter 13 plan as they would have received in a Chapter 7 case. Specifically, in Chapter 13 cases, the hypothetical question is asked “had the case been a Chapter 7, what amount of proceeds would a Chapter 7 Trustee have obtained from the sale of any unprotected (i.e. non-exempt”) assets you own (which would then be distributed to the unsecured creditors in the hypothetical Chapter 7 case?” The answer to that question represents the least amount that the unsecured creditors should receive under your actual (not hypothetical) Chapter 13 Plan in order to satisfy the “Chapter 7 test” standard.
Disposable Income Test
The “Disposable Income” test looks to your budget to see what is the available leftover money you have to pay into your plan each month. This requires looking at the gross income and wages deductions on Schedule I to the petition, any tax refunds which are anticipated to be received over time (typically by looking at last year’s tax refund and dividing by 12) and any other income, such as rental income. Thus, you arrive at a net monthly income available.
Subtracted from this net monthly income are the items noted on Schedule J to the petition, which represents all the monthly expenses for the client. The net income is then subtracted from the expenses to arrive at the monthly disposable income. This disposable income is then multiplied by 36 or 60 (depending on whether your income level is above or below median income) to arrive at the “Disposable Income” Test amount required to be paid under your Chapter 13 Plan.
Sometimes the income, deductions, and/or expenses can be questioned by a Trustee (and may require a ruling by the Bankruptcy Judge). For example, if your petition shows leftover money of $200 each month, but one or more of the items on your Schedule J show luxury type items such as yearly vacations to California or cross-country car trips each year to cheerleading competitions, with an average monthly expense amount at $400 per month then this will likely be questioned by the Chapter 13 Trustee and may not be allowed and will likely result in an increase to the required “Disposable Income” test from the $200 shown on your budget to $600 per month required for approval of the Plan.
Form 22 requires one’s gross income to be identified on the petition. If the gross income is below median income, then the Chapter 13 case would be a 36-month repayment period case, meaning that the disposable income for only 36 months (as opposed to 60 months) to be paid back in the Chapter 13 case. This is a commitment period required unless it’s required if it’s a 36 month commitment as apposed to a 60 month commitment. Form 22 will also have as a final number the amount required to be paid back to general unsecured creditors. Where the income is above median income, there are additional tabs that can be filled on on the forum that can determine what this bottom-lying number is. For example, if the bottom-lying number is $240 and there’s a 5-year commitment period required, form 22 require 230 times 60 months is the amount required to pay back general unsecured creditors. In an above average median income case, this can be a significant amount.
The feasibility standard requires that your plan is affordable and, thus, likely to work out. Feasibility is not a very rigorous standard because whether a plan will work or not can easily be tested by approving the case to see if you are, in fact, able to make the required plan payments as your plan indicates. In the event that the case is obviously not feasible or the client indicates that they cannot make the payments, then the Chapter 13 plan will not be approved.
It is not uncommon for a Chapter 13 case to have problem areas in one or more of the above four standards. Experienced counsel can offer suggestions on how best to address such problem areas in order to accomplish your goals while still complying with the Bankruptcy law.