The New Bankruptcy Chapter 13 Payment Formula

Prior to the enactment of new laws contained in the federal Abuse Prevention Act, the Code used three test measures for analyzing Chapter 13 payments. After these new laws become effective, three additional requirements were added. In total, the bankruptcy Chapter 13 payment formula is defined under the six following parameters:

The old Bankruptcy Chapter 13 Payment Formula:

1. Payments must be proposed in good faith, based on income earned less a reasonable living allowance.
2. Payment amounts must protect the best interest of creditors, both those secured by collateral and general unsecured claim holders.
3. Debts must extend their best effort contributing all disposable income into the plan.

The new Bankruptcy Chapter 13 Payment Formula:

1. Reasonable monthly living expenses are now subject to a single, national statutory limit established by Congress.
2. Current income earned, less the statutory expense limit, multiplied by 60, must result in a test measure below $10,000 to file a plan proposing less than a 5 year duration.
3. The test measure (means testing result from 2. above), must also be less than 25% of total unsecured debts, to propose a plan term below 5 years.

The Bankruptcy Chapter 13 Payment Formula Applied

The actual amount calculated by the bankruptcy Chapter 13 payment formula is now based on total income, less the statutory living allowance. This method of calculation is a significant departure from the old standard which was based on a standard of reasonable in the given circumstance. Judges may not now consider, illness, physical incapacity, medical needs, metal impairment, or cost of transportation to and from work. The Bankruptcy Chapter 13 Payment Formula applies in all plans, regardless of duration or percentage of debts repaid.