How the Means Test determines the length of your Chapter 13 plan

The Means Test isn't just for people contemplating a Chapter 7 filing. The Means Test is also used to calculate a figure that is supposed to represent the amount of disposable income a filer has each month that can be devoted to paying unsecured claims through a Chapter 13 repayment plan.

The Chapter 13 repayment plan can help accomplish several financial goals for a debtor. Here are but a few:

It can provide an orderly way to pay a host of different types of debts by requiring one payment instead of potentially dozens of payments each month.

It can stop interest accrual on certain types of unsecured debt, like credit cards, medical bills and payday loans.
It can catch you up on past due home mortgage arrearages, income and other taxes, child support or alimony.
It is based on your ability to pay rather than the ability of the creditor to set a minimum payment.
It can stretch out certain car loans and adjust the interest rate to a reasonable level.
It can fix the length of time you have to make payments and forgive (discharge) debts that remain unpaid at the end of that time period.

In this article, we're concerned with this last item: the length of a Chapter 13 repayment plan.

A part of the Means Test calculation is a determination of the applicable commitment period. This is just a complicated way of saying that it determines how long the repayment plan will be.

The bankruptcy code allows for a Chapter 13 repayment plan that will last between 36 and 60 months. Under no circumstances will it allowed to extend beyond 60 months. Whether it lasts a maximum of 60 months, or whether a debtor will be allowed a discharge after just 36 months, depends on a calculation in the Means Test.

THE MEASURE OF MEDIAN INCOME

In The Means Test - Current Monthly Income, we discussed what types of income are included in the test, and we also discussed how a debtor's income is viewed. Once all the eligible income is totaled, the household income of the filer is compared against the household income for other households in the filer's state. "Median" income is the point at which half the households are higher and half the households are lower.

The Means Test looks at whether a filer's household income is above-median or below-median.

You can find those figures on the Means Testing website for the US Trustee's office.

I'm in Texas, and I have four people in my household. The median income for a household of four in Texas is $69,570 (as of August 2014 - this figure will adjust periodically).

BELOW MEDIAN - 36 MONTHS

If your household income is below the median for your state, the Means Test will tell you that the applicable commitment period is 36 months. This means that you are only required to stay in a Chapter 13 repayment plan for 36 months.

Why is this important?

Let's say you have $20,000 in credit card debt. You have $250 per month of disposable income according to the Means Test. If you made payments of $250 per month pursuant to a Chapter 13 plan, your payments would total $9,000 over a 36-month plan. Part of that total, approximately 10%, would go to the Chapter 13 trustee to pay his fee for collecting and distributing your payments. The rest would be disbursed among your creditors according to the claims they filed with the court. At the end of 36 months you'd still owe your creditors a pretty penny. Right?

Here's the beauty of Chapter 13: If you complete your Chapter 13 payments (and adhere to some other requirements), the unpaid balances will be forgiven. That's called the discharge.

ABOVE MEDIAN - 60 MONTHS

If your household income is above the median for your state, your applicable commitment period is 60 months. As a result, because you make more money than the below-median folks, you have to stay in Chapter 13 longer and (maybe) pay more money.

Let's look at the example again. If you make payments of $250 for 60 months, your total is $15,000. And, not only will you "save" $5,000, you will "save" all the interest that would have accrued during those five years.

According to BankRate.com's credit card calculator, to retire your $20,000 in debt in just 60 months would cost you $508.00 per month - more than twice the Chapter 13 payment in the example.

But, since you're above-median, it is reasonable to assume that you might have to make payments that are higher, also? Perhaps. The Means Test will deduct certain expenses from your income. What's left over is called "disposable income." If you file a Chapter 13, you will be expected to devote that disposable income to your plan each month. You can read more about the expenses used in the Means Test at The Means Test - Expenses.

CAN MY PLAN STRETCH LONGER THAN 60 MONTHS?

No, the bankruptcy laws and rules are adamant about this. If you can't pay off your plan in 60 months, you will not receive a discharge.

CAN I PAY OFF MY PLAN EARLY?

Sometimes yes, sometimes no.

A plan can be shortened to something less than 36 months for a below-median debtor and less than 60 months for an above-median debtor under the following circumstances:

You're paying 100% of the allowed unsecured claims.

If you're scheduled to pay 100% of allowed claims, you can pay off your plan early or you can increase your payments to complete the plan early.

Conversely, you may be able to reduce your plan payments to stretch them out to 36 months if you need to.