Most people are aware of the fact that in some bankruptcy cases assets could be liquidated in order to satisfy debts. While this is certainly not always the case there are instances which it does happen. In order to determine how much of a debtor’s assets could be used to pay creditors a liquidation test is performed.
Inside A Chapter 13 Filing
Filing for Chapter 13 bankruptcy commits the debtor to paying for certain debts under a structured plan approved by the court. The repayment plan determines which creditors are paid and how much the payments will be each month. One of the requirements used in the development of the repayment plan is the liquidation test, which requires that unsecured creditors be paid at least as much as they would have received had the debtor filed for Chapter 7.
It is important to note that not all Chapter 13 filers are affected by the liquidation test. Bankruptcy exemption laws allow for debtors to protect certain assets from liquidation in bankruptcy. If a debtor’s assets are exempt in the bankruptcy, then nothing would be paid to creditors in Chapter 7. This means that debtors in a Chapter 13 case, whose assets are exempt, would also be free from paying creditors anything as per the liquidation test.
The liquidation test is not the only test used in determining how much a debtor may be required to pay as part of their case. The means test could determine that the debtor has sufficient disposable income to pay creditors. However, these payments would generally be less than if the liquidation test demonstrated eligibility for payment.