The primary difference between Chapter 7 bankruptcy and Chapter 13 is that under Chapter 13, the debtor(s) is required to make payments for the benefit of unsecured creditors during the term of the plan. The term of a plan or “applicable commitment period” ranges in time from 3 to 5 years. One factor in determining the length of the plan is the “median income” of the debtor or debtors in the case of a married couple. Other factors include the ability of the debtor(s) to make affordable payments and the “best interests of creditors” test. Under that test, the debtor(s) is required to pay the unsecured creditors an amount equal to the value of their “unexempt assets” or the value of assets that cannot be protected by the exemptions provided by either federal or state law.
Code section 1325(b)(1) requires a Chapter 13 debtor to pay all unsecured creditors in full or to devote all of the debtor’s “projected disposable income” received during the term of the plan to the payment of the unsecured claims. The calculation of “projected disposable income” and determining the portion of the debtor’s income that is “not reasonably necessary” for the maintenance and support of a debtor is a difficult, fact bound exercise that requires the careful calculation of all sources of the debtor’s current and future income and all of the debtor’s reasonable and necessary living expenses.
In very simple terms, the preparation of a household budget becomes the most important part of the Chapter 13 process. For many of us, monthly budgeting is a foreign concept. But, with time, effort and the collection of receipts for your normal and necessary living expenses, we can work together to fashion a confirmable that will satisfy the test of the Code [1325(b)(1)] and allow you to live in reasonable comfort.
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