The best interest of creditors test in Chapter 13 is a confirmation rule that sets a floor on what your repayment plan has to pay unsecured creditors. Under 11 U.S.C. § 1325(a)(4), each unsecured creditor must receive at least as much through your plan as they would have received if you had filed Chapter 7 and a trustee had sold your non-exempt property instead.1Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan If the plan falls short of that floor, the judge cannot confirm it. The test is often called the liquidation test for exactly that reason.
How the Comparison Works
In a Chapter 7 case, a trustee gathers everything you own that isn’t protected by an exemption, sells it, and splits the proceeds among creditors. Chapter 13 skips the actual sale. You keep your property and pay its equivalent non-exempt value to unsecured creditors over a three- to five-year plan.2United States Courts. Chapter 13 – Bankruptcy Basics The liquidation test exists so creditors aren’t worse off because you chose reorganization over straight liquidation.
The concept is simple: add up what a Chapter 7 trustee could realistically distribute after selling your non-exempt property and paying the costs of sale, then make sure your Chapter 13 plan pays unsecured creditors at least that much. The work is in getting the numbers right.
Figuring Out Your Liquidation Value
Your bankruptcy schedules require you to list everything you own: real estate, vehicles, bank accounts, investment accounts, household goods, jewelry, and anything else of value.2United States Courts. Chapter 13 – Bankruptcy Basics Each asset gets a fair market value based on what it would actually sell for in its current condition, not what you paid or what a replacement would cost. Vehicles usually come from published valuation guides. Real estate may need an appraisal or a comparative market analysis. The trustee and the court check these numbers against public records and your financial documents.
Assets people commonly overlook include pending legal claims, expected tax refunds, and interests in trusts or businesses. A personal injury claim, even one you haven’t filed yet, is property of the estate and must be disclosed. Trustees routinely require debtors to turn over all or part of their tax refunds during the plan.
Exemptions Shrink the Non-Exempt Pile
Exemptions protect a portion of your property, and only the non-exempt portion counts toward the liquidation value. The federal bankruptcy exemptions, adjusted most recently in April 2025, let you protect up to $31,575 in home equity, $5,025 in a motor vehicle, and a general wildcard of $1,675 plus up to $15,800 of any unused homestead exemption.3Office of the Law Revision Counsel. 11 USC 522 – Exemptions
Not every state lets you use the federal exemptions. Roughly two-thirds of states require debtors to use their own state exemption scheme, which may be more or less generous. In states that offer a choice, picking the right set can dramatically change the liquidation calculation. A debtor with substantial home equity in a state with a large homestead exemption might have zero non-exempt equity, while the same debtor using the federal exemption could owe thousands more to unsecured creditors.
Running the Numbers
Once you know fair market values and the exemptions that apply, the math follows a clear order:
- Start with the fair market value of each asset.
- Subtract liens like mortgages and car loans to find the equity.
- Subtract the allowed federal or state exemption.
- Subtract the hypothetical costs of a Chapter 7 sale, including trustee compensation, real estate commissions, and auctioneer fees.
The result is your liquidation value, the minimum total your Chapter 13 plan must distribute to general unsecured creditors over its full term.
The sale-cost deductions matter more than most filers expect. Chapter 7 trustee compensation is capped by statute on a sliding scale,4Office of the Law Revision Counsel. 11 USC 326 – Limitation on Compensation of Trustee a home sale would typically pull 4% to 6% in real estate commissions, and personal property sold at auction often loses 10% to 50% of its value to fees and below-market bids. These deductions work in the debtor’s favor because they lower the minimum payout floor.
Here’s how it plays out. Say you own a home worth $250,000 with a $200,000 mortgage, leaving $50,000 in equity. Your state’s homestead exemption covers $30,000, so the non-exempt equity is $20,000. A hypothetical sale would cost roughly 5% in real estate commissions ($12,500) plus trustee fees on the proceeds. After those deductions, the amount actually available to unsecured creditors in a Chapter 7 liquidation might land closer to $6,000 or $8,000. That reduced figure is the floor your Chapter 13 plan must clear.
The Present Value Catch
The statute requires creditors to receive at least the liquidation amount “as of the effective date of the plan.”1Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan Because Chapter 13 plans stretch over three to five years, a dollar paid in year five is worth less than a dollar paid on day one. Simply matching the raw liquidation number may not be enough if payments are back-loaded. Courts may require the plan to account for the time value of money, which in practice can mean the total paid to unsecured creditors needs to slightly exceed the raw liquidation figure to compensate for the delay.
What the Floor Does to Your Monthly Payment
Divide the total liquidation value across the months of your plan and you get the minimum monthly contribution to unsecured creditors. A $12,000 liquidation value spread over a 60-month plan requires at least $200 per month toward unsecured claims. That $200 sits on top of everything else your plan funds: attorney fees, trustee administrative fees, secured debt arrears, and priority claims.
Plan length matters. Below-median-income debtors start with a three-year plan; above-median-income debtors generally must commit to five.2United States Courts. Chapter 13 – Bankruptcy Basics A below-median debtor struggling to fit the liquidation value into 36 payments can ask the court to extend the plan for cause, spreading the same total over more months. No plan can exceed 60 months.
The Liquidation Test Isn’t the Only Test
If the trustee or any unsecured creditor objects, your plan must also pass the disposable income test under § 1325(b), which requires you to commit all projected disposable income to the plan for the full commitment period.5Office of the Law Revision Counsel. 11 USC 1325 – Confirmation of Plan These two tests measure different things. The disposable income test asks what you can afford. The liquidation test asks what your property is worth. Your plan must satisfy whichever produces the higher number.
This is where plans get squeezed. A debtor with significant home equity but modest income may find that the liquidation test demands more than their budget can absorb. A high-income debtor who rents and owns little property will breeze through the liquidation test but face steep payments under the disposable income test. Both tests must be met, and whichever one sets the higher bar controls.
Priority Debts Stack on Top
Chapter 13 plans must pay priority claims in full, including most tax debts and the administrative costs of the bankruptcy itself.2United States Courts. Chapter 13 – Bankruptcy Basics Priority payments eat into your monthly budget, but they don’t reduce the liquidation floor. If you owe $10,000 in back taxes and your liquidation value is $8,000, your plan needs to cover both. The $8,000 to unsecured creditors doesn’t shrink because you also owe the IRS. This stacking effect catches many filers off guard and is a common reason a proposed plan turns out to be financially unfeasible.
If Your Plan Can’t Clear the Floor
A plan that doesn’t meet the liquidation floor won’t be confirmed. That doesn’t end your case immediately, but it forces a decision. You generally have three options:
- Modify the plan by increasing monthly payments, extending the term (up to 60 months), or restructuring how funds are allocated so unsecured creditors clear the minimum.2United States Courts. Chapter 13 – Bankruptcy Basics
- Convert to Chapter 7. You have an absolute right to convert at any time, and that right cannot be waived. The trade-off is that a trustee will actually sell your non-exempt assets.6Office of the Law Revision Counsel. 11 USC 1307 – Conversion or Dismissal
- Dismiss the case, which ends the bankruptcy and returns you to where you started, minus any funds the trustee has already distributed.6Office of the Law Revision Counsel. 11 USC 1307 – Conversion or Dismissal
If the court dismisses an unconfirmable plan, the trustee may keep enough of your already-submitted funds to cover administrative costs and must return the rest.
The Floor Also Applies at the Exit
One boundary worth knowing: the liquidation test doesn’t only govern confirmation. It resurfaces if you need a hardship discharge to end the case early. A hardship discharge releases you from remaining plan payments when circumstances beyond your control prevent completion, but only if the failure to finish wasn’t your fault, modification isn’t feasible, and unsecured creditors have already received at least as much as they would have gotten in a Chapter 7 liquidation.7Office of the Law Revision Counsel. 11 USC 1328 – Discharge If your plan was front-loading secured debt and pushing unsecured distributions toward the later years, a hardship discharge could be denied even after years of faithful payments.