What is the Liquidation Analysis in Chapter 13 Bankruptcy?

The Chapter 13 liquidation test determines, in part, how much you must pay unsecured creditors through your Chapter 13 plan.

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In Chapter 13 bankruptcy, one of the factors that determine how much you must pay your unsecured creditors through your repayment plan is the liquidation analysis (also referred to as the best interest of creditors test). Under the best interest of creditors or liquidation test, you must pay your unsecured creditors at least as much as they would have received in a Chapter 7 liquidation bankruptcy.

Read on to learn more about the liquidation analysis in Chapter 13 bankruptcy.

What Is the Chapter 13 Bankruptcy Liquidation Analysis?

When you file for Chapter 13 bankruptcy, you 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 trusteereview your proposed plan to make sure it complies with all bankruptcy laws and is fair to your creditors. The trustee will perform a liquidation analysis in your Chapter 13 bankruptcy to make sure that your plan pays your unsecured creditors at least an amount equal to what they would have received in a Chapter 7 case.

What Is the Purpose of the Chapter 13 Liquidation Test?

In Chapter 13 bankruptcy, you agree to pay back a portion of your debts through a repayment plan in exchange for keeping all of your property. In contrast, the trustee in a Chapter 7 bankruptcy has the power to sell your nonexempt assets to pay back your creditors.

The reasoning behind the liquidation test is that if a Chapter 7 trustee would have been able to sell some of your property to pay your unsecured creditors, you should pay those creditors at least an amount equal to what they would have received in a Chapter 7 case through your repayment plan. If you were able to pay your unsecured creditors less in Chapter 13 bankruptcy and still keep all of your property, it would not be fair to them.

How Much Do You Have to Pay?

Whether your unsecured creditors would have received a distribution in a Chapter 7 bankruptcy depends on:

If all of your property is exempt, a Chapter 7 trustee can’t sell your assets to pay your creditors. This means that if you can exempt all of your property, you don’t have to pay anything to your unsecured creditors in Chapter 13 bankruptcy to pass the liquidation test.

But if you have nonexempt property, your proposed plan must pay your unsecured creditors at least as much as they would have been entitled to in a Chapter 7. Depending on the rules in your jurisdiction, the bankruptcy court may also take into account hypothetical trustee’s fees, costs of sale, and capital gains taxes when determining how much you should pay.

What Happens If You Fail the Liquidation Test?

If your plan fails the liquidation test, the trustee will object to its confirmation (approval) by the court. But keep in mind that the liquidation analysis is one of several factors the trustee considers when determining whether your plan should be confirmed or not. This means that even if you pass the liquidation test, the trustee may still object to confirmation of your plan on other grounds.

by: , Attorney

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