Sacramento Law Group

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.

Disclaimer

We are a debt relief agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code. The information contained in this website is for informational purposes only and is not legal advice. Furthermore, the information contained in this website is not guaranteed to be up to date, accurate, or complete. An attorney-client relationship can only be established by signing a representation agreement.
*$900 Chapter 7 Bankruptcy Fee Disclaimer: While most cases qualify for the above fee, some cases are complex. Consequently, the above fee is only a sample fee (not a specific or guaranteed fee) and is subject to change at any time due to the necessity of charging more for complex cases. The sample chapter 7 fee represents the typical fee for a simple no-asset chapter 7 case. The $900 fee is only available to residents of the following counties: Sacramento, Placer, Yolo, Solano and San Joaquin. Residents of other counties may be charged more.