Best Interests of Creditors Test in Chapter 13 Bankruptcy
For a chapter 13 plan to be confirmed (approved) by the bankruptcy court, it must satisfy the “best interests of creditors” test. The best interests of creditors test requires that general unsecured creditors receive through the chapter 13 plan at least what they would have received in chapter 7 liquidation. In chapter 7 bankruptcy general unsecured creditors are entitled to the liquidated value of nonexempt assets (assets that are within the bankruptcy estate and not exempt under California law). Accordingly, under the best interests of creditors test the chapter 13 plan must give general unsecured creditors the liquidated value of all nonexempt property.
Example: You the sole petitioner in chapter 13 bankruptcy and you own a second car with $5,000 of equity that is not exempt under California law. In chapter 7 bankruptcy your nonexempt car would be sold and the $5,000 in proceeds would be distributed to your creditors according to a priority scheme established by the bankruptcy code. Now, assuming that you have general unsecured creditors with at least $5,000 in claims (and assuming some other factors outside the scope of this example), your chapter 13 plan must allocate at least $5,000 to general unsecured creditors because they would have receive at least $5,000 if your nonexempt car were sold in chapter 7 bankruptcy.
Best Interests of Creditors Test Step-by-Step
While the bests interests of creditors tests sounds simple, like many legal tests it has some intricacies when applied. For instance, the bests interests of creditors test requires identifying all nonexempt property existing on the petition date, and valuing that property as of the plan’s effective date; deducting chapter 7 administrative costs, the value of liens encumbering nonexempt assets, and priority claims to produce a “net” liquidation value; adding up the amount of allowed unsecured claims; allocating the “net” according to the chapter 7 priority scheme established in 11 USC § 726(a) to determine what general unsecured creditors would actually receive in chapter 7 bankruptcy; and finally, ensuring that the present value of chapter 13 plan payments to general unsecured creditors at least equals what they would have received in the hypothetical chapter 7 liquidation. This calculus should be applied to all chapter 13 bankruptcy cases before filing to ensure that a confirmable plan is being proposed to the bankruptcy court.
Don’t tackle chapter 13 bankruptcy alone. Call our Bankruptcy Lawyer at (916) 596-1018 to schedule your free consultation.