The Best Interest of Creditors Test

What Is the Best Interest Test?

The best interest of creditors test under Section 1325(a)(4) requires that each holder of an allowed unsecured claim receive at least as much under the plan as they would receive in a Chapter 7 liquidation. For a hardship discharge, this same test must be satisfied as of the date the hardship discharge is granted.

In practical terms, the court must calculate what unsecured creditors would have received if the debtor had filed Chapter 7 instead of Chapter 13, and then verify that the plan payments already made meet or exceed that amount.

How the Calculation Works

1. Identify non-exempt assets -- In a Chapter 7 case, the trustee would liquidate non-exempt assets. The court determines what those assets were worth at the time of filing.
2. Subtract administrative costs -- Chapter 7 trustee fees (typically 25% of the first $5,000, then declining percentages), attorney fees, and other administrative expenses reduce the amount available to unsecured creditors.
3. Calculate the Chapter 7 dividend -- The remaining amount divided by total allowed unsecured claims gives the hypothetical Chapter 7 dividend percentage.
4. Compare to plan payments -- If the Chapter 13 plan has already distributed more to unsecured creditors than the Chapter 7 dividend, the test is satisfied.

When This Test Becomes an Issue

The best interest test is most likely to be a problem when:

• The debtor has significant non-exempt equity in property (a paid-off car, home equity beyond exemption, investment accounts)
• The plan was front-loaded with priority or secured debt payments, and unsecured creditors have received very little so far
• The debtor acquired new assets during the plan period that would have been available in a Chapter 7