Clients considering filing a Chapter 13 bankruptcy are often confused when the discussion with their attorney turns to a comparison between a Chapter 13 and a Chapter 7. The debtor has already decided to file a Chapter 13, so why does the attorney keep talking about Chapter 7, and specifically, the Bests Interests Of The Creditors? There’s a reason.
A Necessary Comparison
When filing a Chapter 13 bankruptcy, your plan will only be confirmed if it meets the Best Interests Test. This test is designed to insure that creditors receive treatment in the Chapter 13 bankruptcy equal to or better than the treatment they would have received if the debtor had filed a Chapter 7 bankruptcy. This comparison is also a great way to confirm the debtor understands the clear differences between the two types of filings.
A Hypothetical
Assume a debtor has assets valued at $3000. Further assume a debtor filed a Chapter 7 and $1000 of those assets would be treated as unprotected (non-exempt) assets. In a Chapter 13, if the debtor wants to keep the assets, the unprotected value of those assets—the $1000—must be paid into the Chapter 13 in order to meet the Best Interests Test. These payments would go to unsecured creditors, as directed by the Trustee.
Best Case Outcome
This does not mean that every Chapter 13 filing requires a similar payment to creditors. If the hypothetical Chapter 7 calculations result in 0 unproteced (non-exempt) assets, then the debtor’s plan will be approved in Chapter 13 without a payment to unsecured creditors. This is often referred to as a “0% Plan” and it is acceptable under these circumstances.
Talk to an attorney today. Bankruptcy is not meant to be overwhelming. It can be a critical part of your solution and financial stability. An attorney can assist in working through these concerns and providing clear, concise options to help you move forward. Email me HERE or call 704.749.7747 today to talk to me.