The Best Interest of Creditors Test in Chapter 13 Bankruptcy

Find out how much you must pay in your Chapter 13 repayment plan to satisfy the best interest of creditors test.

Most people realize that they might not have to pay off all debt in a Chapter 13 bankruptcy plan, but it isn’t always true. How much you must pay is determined by:

  • the best interest of creditors test, which requires you to pay creditors as much as they’d received had you filed for Chapter 7 if not more, and
  • your disposable income—you must pay all of it to creditors for the plan duration.

In this article, you’ll learn about the best interest of creditors test and how to calculate a Chapter 13 repayment plan payment.

The Best Interest of Creditors Test

The purpose of the best interest of creditors test is to make sure your creditors are treated fairly. It ensures that creditors get as much in Chapter 13 as they would in Chapter 7. If your plan doesn't satisfy the best interest of creditors test, the court won't confirm (approve) it.

Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to keep all of your property, including nonexempt assets (those things that you can’t protect with a bankruptcy exemption). In exchange for keeping your property, you agree to pay off a portion of your debts through a repayment plan.

If your unsecured creditors would have received a distribution in Chapter 7 bankruptcy, it would be unfair if you didn’t pay them as much in your Chapter 13 and still got to keep all of your property.

But keep in mind that this test calculates the minimum amount you must pay your unsecured creditors. If you have a significant amount of disposable income, you might have to pay a higher dividend.

Find out more about the differences between Chapter 7 and 13.

How the Best Interest of Creditors Test Works

In Chapter 7 bankruptcy, the bankruptcy trustee can sell your nonexempt property to pay back your creditors. Whether your unsecured creditors would receive anything in Chapter 7 bankruptcy depends on:

  • how much property you own, and
  • the exemption laws of your state.

If all of your property is exempt, a Chapter 7 trustee can’t sell it to pay your creditors. As a result, if you have no nonexempt assets, you technically don’t have to pay anything to unsecured creditors in Chapter 13 bankruptcy to satisfy the best interest of creditors test. If you can’t exempt all of your property, you must pay an amount at least equal to the nonexempt portion of your property’s value.

However, keep in mind that the best interest of creditors test looks at how much creditors would have received if the trustee had liquidated your assets in Chapter 7. Depending on the rules in your jurisdiction, the bankruptcy court might allow you to deduct any hypothetical Chapter 7 trustee’s fees and sale costs when determining the amount required to satisfy the best interest of creditors test.

Learn more about nonexempt property and bankruptcy exemptions.

How to Calculate a Chapter 13 Payment Using the Best Interest of Creditors Test

Every Chapter 13 filer starts by determining whether a three- or five-year plan is required, and the amount of disposable income the filer has to pay to creditors each month. You’ll calculate both of these factors using two forms:

Once you’ve calculated those figures, you’ll tally up the value of your nonexempt property minus costs of sale (if your court allows it). If your disposable income is more than the nonexempt property total, you’ll pay the disposable income amount. If, however, the value of your nonexempt property exceeds your disposable income, you’ll be required to pay creditors an amount equal to the property value.

You’ve likely spotted a problem here—how would it be possible to pay creditors more than the disposable income available to you? It wouldn’t, of course, which would prove problematic. The court wouldn’t confirm (approve) such a Chapter 13 repayment plan.

The situation isn’t hopeless, however. Although the Chapter 13 trustee doesn’t sell property for you, you could propose to do so and to use the proceeds to fund your plan. Although it might not be the answer you or any other debtor would want to hear, filing for bankruptcy usually involves concessions.

Find more information on calculating a Chapter 13 plan payment in the Chapter 13 repayment plan.

Consult With a Bankruptcy Lawyer

Chapter 13 is a complicated bankruptcy chapter, and the vast majority of filers aren’t able to propose a confirmable plan or complete it. Before determining whether Chapter 13 will work for you, it’s a good idea to meet with a knowledgeable bankruptcy attorney in your area.

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