One of the primary reasons people choose Chapter 13 bankruptcy over Chapter 7 is the ability to keep their property. Whether it’s a family home with significant equity, a second vehicle, or a family heirloom, Chapter 13 allows you to "reorganize" rather than "liquidate."
However, just because you get to keep your property doesn’t mean your creditors are left with nothing. To have your Chapter 13 Plan confirmed by the court, you must satisfy a critical legal requirement known as the Liquidation Analysis—often referred to as the "Best Interest of Creditors" Test.
What is the Liquidation Analysis?
Under 11 U.S. Code § 1325(a)(4), a bankruptcy court cannot approve (confirm) your repayment plan unless it meets a specific financial floor.
The law states that the amount your unsecured creditors (like credit card companies and medical providers) receive through your Chapter 13 plan must be not less than what they would have received if you had filed for Chapter 7 and your non-exempt assets were sold by a trustee.
In simpler terms: Your creditors cannot be worse off because you chose Chapter 13 instead of Chapter 7.
How the Calculation Works
When we prepare your Chapter 13 filing, we perform a "hypothetical liquidation" to determine this minimum payment amount. The math typically looks like this:
Valuation: We determine the fair market value of all your assets (house, cars, jewelry, bank accounts, etc.).
Exemptions: We subtract the value of the property you are allowed to keep under Alabama law (or federal law, depending on your residency).
Hypothetical Costs: We subtract the estimated costs that a Chapter 7 trustee would incur to sell the property, such as realtor commissions and administrative fees.
The "Floor": The remaining number is the "Liquidation Value." This is the minimum total amount you must pay to your general unsecured creditors over the 3-to-5-year life of your Chapter 13 plan.
An Example in Practice
Imagine you own a piece of land worth $50,000. If you have no exemptions left to protect it, a Chapter 7 trustee would sell that land to pay your creditors.
If you want to keep that land and file for Chapter 13 instead, your repayment plan must be structured so that your unsecured creditors eventually receive at least that same $50,000 (minus hypothetical selling costs) over the duration of your plan. If your plan only proposes to pay them $10,000, the court will deny confirmation because it fails the § 1325(a)(4) test.
Why This Matters for Your Plan Confirmation
The Liquidation Analysis is one of the most common "hiccups" in the confirmation process. If a debtor underestimates the value of their home or forgets to account for a valuable asset, the Trustee or a creditor may object to the plan.
At Ryan Legal Services, we focus on getting these numbers right from the start. A successful Chapter 13 case requires a delicate balance between:
- What you can afford (Disposable Income Test).
- What the law says creditors must receive (Liquidation Analysis).
Navigating the Complexity
Bankruptcy law is designed to give you a fresh start, but the requirements for a confirmable plan are strict. Understanding how the Liquidation Analysis affects your monthly payment is vital to a successful outcome.
If you are considering bankruptcy in Alabama and want to know how your assets will impact your Chapter 13 plan, we are here to help.
Ready to take the next step? Contact Ryan Legal Services today at (251) 431-6012 or visit us at www.ryanbk.com to schedule a consultation. We’ll help you analyze your assets and build a plan that protects your future.
Legal Disclaimer: This blog post is intended for general informational purposes only. No Attorney Client Relationship is formed or intended based on this blog post.