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Chapter 13 plans
Best interests test
The best interests test, also called the best interest of creditors test, is a Chapter 13 requirement that unsecured creditors receive at least as much under the plan as they would if the debtor's assets were liquidated under Chapter 7. 1
Talk to a lawyerHow it works
The test sets a floor for the plan. The court compares what each allowed unsecured claim will receive under the plan, valued as of the plan's effective date, with what that claim would be paid in a Chapter 7 liquidation on the same date. 1
In Chapter 7, a trustee may sell a debtor's nonexempt property and pay the proceeds to creditors. Exempt property is property the law lets an individual keep from unsecured creditors. So the more nonexempt property a person has, the more the plan generally has to pay. 2 3 1
A plan does not have to pay unsecured claims in full. It has to meet this floor and, if the trustee or an unsecured creditor objects, commit all projected disposable income for the applicable commitment period. 1
The judge decides at the confirmation hearing whether the plan meets the standards for confirmation. 4
Common questions
Is this the same as the best interests of the child test?
No. That is a family law standard used in custody cases. In bankruptcy, the best interests test protects unsecured creditors by setting a floor for what a Chapter 13 plan must pay them. 1
Why do exemptions matter in Chapter 13 if nothing is sold?
Does the same idea apply to a hardship discharge?
Yes. One condition for a hardship discharge is that creditors have received at least as much as they would have in a Chapter 7 liquidation case. 4
Sources
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