Cite as: Keith M. Lundin, Lundin On Chapter 13, § 8.2, at ¶ ____, LundinOnChapter13.com (last visited __________).
To be eligible and to accomplish confirmation of a Chapter 13 plan, the debtor must have some ability to pay claim holders.1 Notwithstanding a sincere desire to repay claim holders and the unattractiveness of alternatives, some debtors simply do not have sufficient income to fund a Chapter 13 plan.
The test is an income test—the debtor must be able to pay for basic personal and family needs and have money left over to pay claims. For eligibility purposes, the amount left over need not be any particular amount in real dollars or as a percentage of debt. Debtors can propose confirmable Chapter 13 plans even if there is no money available to pay unsecured creditors after the debtor’s income is reduced by amounts reasonable and necessary for the support of the debtor and the debtor’s dependents.2 Put another way, ability to pay creditors does not necessarily mean that the potential Chapter 13 debtor has income left over to pay unsecured creditors.
It is not uncommon that a Chapter 13 debtor’s income is fully exhausted by payment of regular household expenses and a few secured creditors with liens on necessities such as the family car or home. “Success” in a Chapter 13 case is not necessarily measured against how much a debtor is able to pay unsecured creditors. Ability to pay may mean that the debtor has sufficient income to stabilize and maintain ordinary household expenses going forward, including a place to live and transportation to work, school, doctors and the like. Payments to unsecured creditors are not always or necessarily part of this picture.
However, it does not follow that every debtor should be a Chapter 13 debtor. Chapter 13 was intended to facilitate repayment of debt. “Deep compositions”—Chapter 13 plans that pay nothing or a very small percentage of unsecured claims—are available in most jurisdictions for debtors with limited ability to pay. However, as the depth of the composition approaches no payment to unsecured claim holders, counsel’s obligation to offer alternatives to Chapter 13 increases.
1 See § 13.1 Debtor Must Be Able to Make Payments under a Plan. The ability of a debtor to make payments called for by a plan is the essence of the feasibility requirement for confirmation in 11 U.S.C. § 1325(a)(6), discussed in § 111.1 Able to Make Payments and Comply with Plan.
2 See § 93.1 Section 1325(b)(2)(A) and (B): “Amounts Reasonably Necessary to Be Expended—” When CMI Is Less Than Median Family Income and § 94.1 Big Picture: Too Many Issues for discussion of the amount and period of time over which plan payments may be required when the debtor has no net income after payment of household expenses.