Chapter 13 Confirmation Hearing in U.S. Bankruptcy Courts
Only U.S. bankruptcy courts confirm plans. Debtors prepare plans, trustees review proposals and report recommendations, and creditors may object. But the U.S. bankruptcy courts have the final word. U.S. bankruptcy courts use a 3 pronged test deciding whether to confirm or deny:
- Good Faith Test - the debtor's plan must represent a good faith effort to repay creditors.
- Best Interest Test - the proposed plan must serve the best interest of creditors. In practice, this means that creditors must receive an amount equal to or above what they would receive if the debtor filed under Chapter 7, in the opinion of U.S. bankruptcy courts.
- Best Efforts Test - debtors must pay all disposable income into the plan, according to technical guidelines determined by U.S. bankruptcy courts for income and expenses.
The good faith test often turns on the likelihood of plan completion. If income is insufficient to realistically support the debtor and remain current with payments, the plan is destined to fail.
The best interest test implicitly incorporates bankruptcy exemptions. If all assets are exempt as in most no-asset cases, creditors would receiving nothing in a Chapter 7 case liquidated by U.S. bankruptcy courts. Alternatively, if the debtors own significant non-exempt assets, the best interest test could bar confirmation.
U.S. bankruptcy courts typically examine debtors regarding the best efforts test. Income is fairly easily determined based upon salary deductions or other financial records. Questions and conflicts are likely to occur regarding reasonable expenses. Each person is unique. When determining a reasonable level of financial support for debtors and calculating disposable income, creditors frequently object. The question remains unclear and highly contested: how much should U.S. bankruptcy courts allow debtors to spend for monthly living allowances if the plan pays creditors 10 cents on the dollar?
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