Personal Bankruptcy Payments in Chapter 13 Plans
Debtors determine their own payment amounts, subject to approval by the trustee and the court. Creditors may also object. The amount of personal bankruptcy payments offered is reviewed by the court for compliance with applicable personal bankruptcy laws, and also consider all objections.
To confirm a personal bankruptcy plan, courts use a three pronged test:
- The Good Faith Test - the personal bankruptcy plan must represent a good faith effort to repay creditors;
- The Best Interest Test - the personal bankruptcy plan 13 must serve the best interest of secured and unsecured creditors. To pass this requirement, the plan must provide creditors amounts equal or above the value they would receive if the case had been filed under chapter 7; and
- The Best Efforts Test - debtors must pay all disposable income to a trustee for the duration of the personal bankruptcy plan, or until all debts are paid in full.
The good faith test often turns on the probability of the debtor making monthly payments. If disposable income is insufficient to fund the plan and pay monthly living expenses, the court will consider the personal bankruptcy plan destined to fail.
The best interest test necessarily depends on exemption values. If all assets of the personal bankruptcy estate are exempted by statute, creditors would receive nothing under chapter 7. However, if significant nonexempt assets are available for distribution. the test may reveal that the best interest of creditors would be better served through liquidation.
Judges question debtors in open court during confirmation hearings. In particular, judges question debtors about proposed payments and their ability to continue payments through completion of the personal bankruptcy plan. Income is often easy to verify, yet expenses prove troublesome for many debtors. Creditors may object to requested expenses claiming excessive allowances or abuse. Judges ultimately decide if payments pass all code requirements and either confirm, deny, or require modification of proposed personal bankruptcy plans.
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