“Best Effort” Requirement In Chapter 13 Bankruptcy
When debts become overwhelming, individuals have the option of filing for bankruptcy. Two of the commonly filed bankruptcies in Iowa and the U.S., in general, are Chapter 7 and Chapter 13 bankruptcies. Generally, every debtor seeking financial relief would want to file for Chapter 7 bankruptcy. However, not everyone can qualify for Chapter 7 bankruptcy. For instance, if you fail the means test, you can’t be eligible for a Chapter 7 bankruptcy. Fortunately, individuals that are ineligible for Chapter 7 bankruptcy can qualify for Chapter 13 bankruptcy.
Chapter 13 and 7 bankruptcies differ; a Chapter 7 bankruptcy gives you the chance to have your debts wiped away while a Chapter 13 bankruptcy offers you an opportunity to have your debts re-arranged. When the court wipes away your debts, it means that you no longer have a legal obligation to pay off the eliminated debts. On the other hand, when the court re-arranges your debts, it means you still need to pay all, or most, of your debts, but over a period of time.
If you are considering filing for Chapter 13 bankruptcy, you must familiarize yourself with the “best effort” requirement. Generally, your Chapter 13 repayment plan cannot be approved if it doesn’t meet this requirement.
Best Effort Requirement
After you and your bankruptcy attorney file your Chapter 13 bankruptcy case, your bankruptcy trustee will review your proposed repayment plan to ensure that what you plan to pay off is your best effort. Basically, the court can only approve your repayment plan if you show that it is your best effort at paying off your creditors.
At large, for a Chapter 13 repayment plan to be your best effort, it needs to show that you plan to pay back non-priority unsecured debts using your disposable income. Your disposable income is the money you remain with after paying your living expenses and any secured and priority debts. Priority debts include child support and alimony debts, whereas secured debts include mortgages and car loans. Secured debts are usually tied to specific assets, while priority debts are important debts that must be repaid even if they aren’t tied to any assets. Lastly, non-priority unsecured debts include credit cards and medical debts.
Why Does Your Median Income Matter?
Non-priority unsecured debts generally take the last priority when it comes to repayment. Therefore, repayment of such debts depends on whether an individual’s income is below or above their state’s median income.
Suppose your income is less than the state median for a household of the same size as yours. In such a case, you might end up meeting the best effort requirement without needing to pay much or even any of your non-priority unsecured debts. On the other hand, if your income is above the state median for a household of the same size as yours, you’ll have to use your disposable income to pay off a good deal of your non-priority unsecured debts. The court will most likely expect you to pay off your non-priority unsecured debts over a period of five years. After the set period, the court can eliminate any remaining debts.
Contact a Southeast Iowa Bankruptcy Lawyer Today
If you need help understanding the bankruptcy process or filing for bankruptcy, contact a skilled Southeast Iowa bankruptcy attorney at the Noyes Law Office to schedule a consultation.