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Differences in Chapter 13 Bankruptcy Plan Payments and Qualification

The means test causes bankruptcy Chapter 7 and 13 differences in several ways that affect the benefits of filing dramatically. The following article explores qualification requirements for 36 and 60 month payment terms and payment amounts.

Because of the length of the plan, individuals must submit to court supervision of living allowances from three to five years. Bankruptcy Chapter 13 differences -- from Chapter 7 -- include the obligation to pay all excess income into the plan. The court determines the excess. Then, in turn, the trustee collects all income received that exceeds the court's assessment of an adequate monthly budget for living expenses. In a relatively few cases, the court's assessment may seem lavish. In most cases, living expenses during the plan are modest.

The Means Test Role in Chapter 13 Cases and the Length of Plan Terms

Bankruptcy Means Test
Different Payments and Terms Are Determined by the Bankruptcy Means Test

The Chapter 7 bankruptcy means test and the Chapter 13 bankruptcy means test are one and the same. The official test form is designated as B 22A (Official Form 22A). The clerk of the court in each federal district provides them free of charge.

In simple terms, anyone who earns more than the median income for their state of residency must file a 60 month plan. People who earn less than their state's median income may choose to file a 36 month plan.

Median income is not the same as average income. Think of the measure of a median as the middle rank. For example, if you considered a group of 101 people, the income earned by the 51st ranked person would represent the median income. This is because 50 people earned more and 50 people earned less. This measure prevents the top 5% of income earners in a state from unduly swaying the test measure.

Average income figures tend to be higher than a state's median income because of the extraordinarily high incomes earned by the top 2 to 3 percent earns within any state. Compared to the past, bankruptcy Chapter 13 differences today include this mandatory living expense cap that has the effect of limiting a judge's discretion.

Net Income Determines Different Bankruptcy Plan Payments

Chapter 13
Chapter 13 Judges Resolve Disputes Among Parties in Interest

The test compares total income received to allowable living expenses. After deducting expenses from income, the calculation of net monthly income determines the plan payment.

Means test differences are important. The calculation of total income is about what most people expect. All income received for personal use must be included. Household income received for the benefit of dependents is not included in personal income for debtors who file. The means test does however include a few income rules that can be changed in favor of a debtor over the six full months before filing. These rules create a valuable opportunity for all debtors who begin planning early.

The rules for allowed expense deductions are somewhat more complicated. A few of the rules are simply bizarre.

Actual expenses paid are not used to determine net monthly expenses for test purposes. The test adopts a variety of pre-set schedules for allowed living expenses. In most cases, the amount of allowed living expenses is somewhat low but nevertheless are usually sufficient to maintain a modest lifestyle until the expiration of the plan term.

In addition, allowable expenses include actual expenses in some categories. The incorporation of actual expenses also creates another opportunity for individuals to influence a future plan payment by the way money is spent.

If you review the Official Form B 22A - Chapter 13 Bankruptcy Means Test that is entitled "Statement of Current Monthly Income and Means Test Calculation" (free download), notice that the instructions give little if any help discovering these opportunities.

How to Change Means Test Results

The means test look-back period is six months. All income earned and some actual living expenses during this period change the test result. All income and expense amounts must be accurate and are subject to verification by an Assistant U.S. Trustee.

Preparation is the key for success when filing under any chapter. The best results begin months in advance with a review of permissible tactics for lowering income, maximizing expense deductions, and improving means test results. An understanding of the test and permissible practices is essential to prevent overpaying and perhaps avoid filing Chapter 13 bankruptcy altogether.

Would you like to know more about maximizing your means test results with absolute certainty?