It’s one of the most important questions debtors can ask, particularly if their incomes are above the median for their state and they don’t expect to pass the means test. There are three tests the Bankruptcy Code applies to debtors’ repayment plans before they can be confirmed. A plan must pass all three tests and the one with the highest dollar figure will be the amount a debtor will repay. Although they appear in Section 1325, they aren’t grouped together, and what follows are descriptions, not formal names.
(1) The priority claims test. A repayment plan must pay all priority claims in full. If priority claims are the bulk of a debtor’s debts, then this test will show how much they will need to pay.
(2) The best interests of the creditors test. The plan must distribute as much or more to the creditors as if the debtor had filed a chapter 7 bankruptcy.
(3) The best efforts test. If the debtor’s (non-priority) debts cannot be completely repaid during the plan, then the debtor must promise to dedicate all of his or her “disposable income” under the plan. Practically speaking, in New York, debtors who do not promise to pay something to their unsecured creditors will fail this test. Elsewhere trustees are more lenient. Debtors proposing 100 percent repayment plans will need to pass this test easily.
Although these tests are fairly straightforward, it’s very important to reiterate that the value from the highest one determines the size of the payments. Passing the best interests of the creditors test is probably the most obviously straightforward as no creditor or the trustee would accept anything less than what they could get in chapter 7. Likewise, debtors with large priority claims will look to those as the upper limit to what they can propose. Finally, so long as the other two tests are met, debtors who still cannot pay all of his or her unsecured debts, can promise all of their disposable income to remain in chapter 13.
Because chapter 13 requires a closer look at the character of the debtor’s obligations, it’s crucial to plan it with an experienced New York bankruptcy lawyer.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.