May 24, 2016
The liquidation analysis (also referred to as the best interest of creditors test) helps determine the Chapter 13 repayment amount that you must pay your unsecured creditors (debts not guaranteed by property) over the course of your plan. In short, the liquidation amount is the value of the property you would have to sell if you chose to file for Chapter 7 bankruptcy. However, if you want to know how much your Chapter 13 payment will be, you must determine another figure, as well—your disposable income (the money left over after you pay your bills each month). You’ll pay the higher of either your liquidation amount or your disposable income to your unsecured creditors over the course of your three- to five-year repayment plan.
When you file for Chapter 7 bankruptcy, you agree that the bankruptcy trustee—the person in charge of administering your bankruptcy—can sell a portion of your property and give the funds to your creditors. In exchange, your qualifying debt gets wiped out (discharged) without the need to pay into a repayment plan.
By contrast, when you file for Chapter 13 bankruptcy, you get to keep your property and agree to pay back your creditors a certain amount over three to five years. At the end of the repayment period, any remaining balance on your qualifying debt gets discharged. The liquidation analysis helps the court determine how much money you must pay into your Chapter 13 repayment plan.
When you file for Chapter 13 bankruptcy, you must pay your creditors at least as much as they would have received in a Chapter 7 case. The liquidation analysis is simply a way to figure out how much you would have paid your creditors if the Chapter 7 trustee liquidated (sold) your unexempt property (the property you can’t keep) and distributed the funds to your creditors.
When you file for Chapter 7 or Chapter 13 bankruptcy, your property is classified as either exempt or nonexempt property. “Exempt” property is the property that your state determines you’ll need to continue to work and live, such as household belongings, clothing, and a modest car. You’ll find the property that you can exempt listed in your state’s exemption statute. “Nonexempt” property is all of the property that you can’t keep because it doesn’t appear on your state’s exemption list. What happens to your nonexempt property depends on the bankruptcy chapter that you file.
Chapter 7 bankruptcy. In Chapter 7 bankruptcy, the trustee sells your nonexempt property for the benefit of your creditors. For instance, if you have a nonexempt boat worth $20,000, the trustee will sell it and distribute the proceeds to your creditors.
Chapter 13 bankruptcy. Unlike Chapter 7 bankruptcy, when you file for Chapter 13 bankruptcy, the trustee doesn’t sell your property—you get to keep it. But it’s not a free ride. Even though the trustee won’t sell your property, your creditors are entitled to receive as much money as they would have received in a Chapter 7 bankruptcy. As a result, you must pay for your nonexempt property through your plan. For instance, if you have a nonexempt boat worth $20,000 when you file for Chapter 13 bankruptcy, you’ll have to pay your creditors at least $20,000 in your repayment plan.
You’ll arrive at your Chapter 13 liquidation amount by adding up all of your nonexempt property. Keep in mind that when you complete your bankruptcy petition, you’ll fill out another test on official bankruptcy Form 122C-2 Chapter 13 Calculation of Your Disposable Income. On the form, you’ll deduct allowed expenses from your income and arrive at your monthly disposable income. You’ll multiply your monthly disposable income by 36 months if your income is less than the median income of your state, or by 60 months if your income is above the median income of your state. You’ll compare your liquidation analysis amount to your total disposable income amount. The greater of the two is the amount you must pay your unsecured creditors over the course of your repayment plan.
After you determine the amount that you’re required to pay your unsecured creditors, you’ll propose a plan to pay back some or all of your debts through a repayment plan. (Learn about the Chapter 13 repayment plan.) The court and the Chapter 13 bankruptcy trustee will review your proposed plan to make sure it complies with all bankruptcy laws and is fair to your creditors.