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The Best Interest Of Creditors Test And Chapter 13 Cases

A frequently asked question is: What are some of the differences between Chapter 7 and Chapter 13 bankruptcy cases? The main difference is that a Chapter 13 case is a reorganization of debts and liabilities under either Chapter 11 or Chapter 13 under the Bankruptcy Code (the "Code"), found in Title 11 of the U.S. Code. The second type of bankruptcy is a liquidation of assets under Chapter 7 of the Code, i.e., a Chapter 7 case. It is relevant that debtors filing Chapter 11 and Chapter 13 cases are affected by their hypothetical filing of a Chapter 7 case.  

The best interest of creditors test pursuant to § 1325(a)(4) of the Bankruptcy Code is applied to debtors in Chapter 13 cases to determine the minimum amount they must pay to general unsecured creditors in their reorganization under Chapter 13. This test and provision for the resulting payment are necessary for confirmation of a debtor's proposed Chapter 13 plan. A debtor's hypothetical filing in a Chapter 7 case is relevant to this determination since the best interest of creditors test analysis is based on the debtor's liquidation of assets in a Chapter 7 bankruptcy case.

The best interest of creditors test, also known as a liquidation test or analysis, involves the consideration of not only the value of the nonexempt assets in fact liquidated, but also the costs of liquidation. These costs include the expenses of selling assets and other administrative costs, including trustee's fees.

This liquidation test starts with identifying all nonexempt property as of the date of the filing of the bankruptcy petition while estimating the value of this property as of the effective date of the Chapter 13 plan. The amount of any liens encumbering nonexempt assets is deducted at this time. Then any administrative costs and priority claims are deducted to arrive at a “net” liquidation value. Debtors must then pay this amount into their Chapter 13 plan which is divided pro rata by general unsecured creditors whose claims are approved. Finally, the present value of payments to general unsecured creditors in a proposed chapter 13 plan must at least equal what they would have received in a hypothetical chapter 7 liquidation case.

This is a complicated analysis and requires the assistance of an experienced bankruptcy attorney. Also of significant importance is the fact that this only represents a minimum payment to general unsecured creditors. Debtors in Chapter 13 cases with a significant amount of disposable income may have an even higher payment to unsecured creditors.

The experienced South Florida defense attorneys at Loan Lawyers are here to help you if your financial position necessitates the consideration of a bankruptcy case filing under Chapter 7, 11, or 13. To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling (888) FIGHT-13 (344-4813).