What is the Best Interest in Bankruptcy?

Posted on Aug 21, 2013 By Cynthia T. Lawson

Cynthia LawsonBest Interest is one of the factors that must be met in order to have a chapter 13 plan confirmed or approved by the Bankruptcy Judge.  Best Interest test or liquidity test is found at 11 U.S.C. §1325(a)(4).  This section of the bankruptcy code provides that for a chapter 13 plan to be confirmed the debtor must be paying to allowed unsecured creditors not less than the amount that would be paid on such claims if the debtor had filed a chapter 7 bankruptcy. In a nut shell, are creditors in a chapter 13 getting as much as they would have received in a chapter 7?

Many times an individual cannot file a chapter 7 bankruptcy because they have equity in an asset that cannot be protected or exempt. If the individual filed a chapter 7 the Trustee in bankruptcy would sell the asset to pay creditors. If the individual filing bankruptcy does not want to lose the asset, such as a home or vehicle, then sometimes the individual can propose to pay the amount the chapter 7 Trustee would have received from selling the asset to his unsecured creditors in a chapter 13 in order to keep the asset.  In a chapter 13 the individual has as much as 5 years to pay that amount to their creditors. The comparison between what the debtor is proposing to pay in the chapter 13 and the amount the chapter 7 trustee would have been able to hypothetically pay creditors in a chapter 7 is the best interest or liquidity test.

Be sure when you meet with an attorney at Bond & Botes you have a good idea of what you owe on loans such as houses or vehicles and an idea of what the asset is worth.  Bankruptcy attorneys are not trying to be nosey or intrusive when we ask you for that information. We are simply trying to analyze whether you would lose the asset if you filed a chapter 7 or whether you would be better off filing a chapter 13.