What is the Best Interests Test under Section 1325(a)(4) of the Bankruptcy Code?

20 Oct What is the Best Interests Test under Section 1325(a)(4) of the Bankruptcy Code?

In a Chapter 13 case, the Best Interests Test must be met in order to get a Chapter 13 case confirmed. The Best Interests Test is the value of payments made on each unsecured claim that is “not less than the amount that would be paid on such claim if the estate of the debtor were to be liquidated under Chapter 7”. In other words, if the debtor was to file a Chapter 7 and he had assets that would be available (non-exempt) for the benefit of his creditors, the value of those assets must be paid in the Chapter 13 in order to pass the Best Interests Test. For example, a debtor owns stock that is worth $10,000.00 and the debtor is unable to exempt the value of the stock in his Chapter 7 case. If the debtor filed a Chapter 13, he could keep the stock but he would be required to pay $10,000.00 to his unsecured creditors through the Chapter 13 to pass the Best Interests Test. The fact that a Chapter 13 plan proposes to pay 0% to the unsecured creditors does not mean the plan fails the Best Interests Test. Distribution of property of the estate under Section 726 of the Bankruptcy Code applies in Chapter 13 cases through the Best Interests Test. If the liquidation value of the estate is is only enough to pay all of the claims under Section 726 ahead of the unsecured creditors, a 0% plan is acceptable.

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Jay S. Fleischman is a bankruptcy lawyer with offices in Los Angeles and New York. He can often be found on Google+ and Twitter, where he shares information about consumer protection issues and personal finance.
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