Means test step 4: Secured debt expenses and priority claims

Reducing the current monthly income (CMI) by secured debt and priority claims

Step 4 in the means test is to determine the debtor’s monthly payments for secured debts and priority claims.It also includes any arrearages you (the debtor) may have on a secured debt to bring the debt current. Also included is the cost of administrative expenses in a Chapter 13 case. These calculations are included in Subpart C of Part V of Form B22A and Subpart C of Part IV of Form B22C.This monthly average is calculated by determining the total debt for 60 months and then dividing the total by 60. For each secured debt, divide the total obligation by 60 to determine the monthly amount. For debts with a term longer than 60 months, like a mortgage, the monthly payment is used. (The monthly payment X60/60 = monthly payment.)If an obligation has a term of less than 60 months, the total amount of the secured loan must still be divided by 60, regardless of the actual term. Be sure to include interest costs for the total debt.When entering payments on secured claims:

  • In the case of a variable rate loan, use the loan rate in effect on the petition date.
  • In the case of a balloon payment due within 60 months, use the full amount of the balloon to calculate the average payment.
  • Include debts for luxury items. (Caveat: debts for luxury items may demonstrate a lack of good faith that could prevent confirmation or support dismissal.)
  • Do not include payments on secured items that the debtor intends to surrender the collateral.

In the “Other Payments” section of the form, only debts necessary for the support of the debtor and his or her dependents may be used. If the debtor is in arrears on a secured debt that is necessary for the support of the debtor’s family, the cure amount is the amount the debtor needs to bring the debt current. For the purpose of means testing, the total cure amount must be divided by 60 and added to the debtor’s monthly expenses.Next, the debtor’s debt on all priority claims must be calculated by dividing the total by 60. For priority claims with a term of less than 60 months, divide the total by 60. For monthly priority claims with a term longer than 60 months, the monthly payment is used. (The monthly payment X60/60 = monthly payment.) Use only the total of priority debts due at the time of filing.The cost of administrative expenses under Chapter 13 must be listed. The amount deducted may not exceed 10 percent of the projected monthly plan payments. This figure may be a reasonable estimation.

Example of calculations

Our debtor’s (this hypothetical was begun in the article on step 1 of the means test) secured debt expenses are determined as follows:Mortgage payment on principal residence: $800Car payment for one vehicle: ($24,000 ÷ 60) = $400Arrearage on mortgage payment: ($1,600 ÷ 60) = $27Administrative expense: $160Total deduction for debt payment: $1,387

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