It’s Not Smart To Overpay

Don't Pay Too Much In Chapter 13



Some mistakes the Chapter 13 trustee will call you on;  others go unremarked.  

So let’s discuss some simplistic thinking that has your Chapter 13 client paying too much into the plan.

I’ve reviewed any number of newbie plans that use the non exempt equity in the debtor’s possessions as the liquidation premium.

Subtract the exemptions from the value of the assets and you have, they think, the measure of the “best interests of creditors” test for confirmation.

Nope.  Let’s look at the Code to see why that’s too much.

Confirmation test

The Code requires for confirmation that a plan give each unsecured claim no less than the amount that would be paid on the claim in a Chapter 7 liquidation.  § 1325(a)(4).

The difference between the newbie world view and the Code encompasses the trustee’s costs of administration.

In a Chapter 7, tangible assets don’t become distributable dollars at the wave of the trustee’s wand.  The trustee generally incurs expenses, payable from the estate, in turning assets into cash.

The trustee also gets paid from the estate for his work.  The formula for paying trustees is found in §326(a).  So the trustee’s commission comes off the gross total of dollars distributed to creditors. (The trustee does not get a commission on any money paid to the debtor on account of exemptions, or any money paid to co owners of assets he sells).

Asset by asset

In calculating the plan pot, debtor’s counsel needs to analyze how much it will cost the trustee to administer the estate up to the point where he is ready to cut checks to creditors.

If the asset is cash in the bank, there are no “costs of sale”.  Trustee writes a letter and the money is turned over.

If the asset is real estate, the estate will be paying a realtor and closing costs.  A sale of land will usually require the estate to file a tax return, so subtract something for an accountant.

Suppose the real estate is depreciated real property:  there may be capital gains taxes which the estate must pay before paying out money to creditors.  Take that off the sum of non exempt equity.

And if the asset is a preference action, some allowance has to be made for the costs of collection.  Or an analysis of whether a preference of small size would actually be recovered.  You must make deductions here for either the costs of suit, including professional fees, and for any discount offered to reach settlement.

You get the picture.  Imagine what it takes to turn the debtor’s non exempt assets into cash and quantify the costs of doing so.

It is the net, non exempt equity that measures what unsecured creditors, priority and general unsecureds, must get to have a confirmable plan.

Go forth, readers, and calculate.

If you are local to the San Francisco Bay Area, I’m presenting a two hour live class on crafting Chapter 13 plans.  A more detailed look at the liquidation test is just a part of that exploration of how to get to the right numbers for a Chapter 13 plan.  The date is April 14th.  There are more details at

Image courtesy of Sharon Drummond.

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  1. Funny, I thought a chapter 13 debtor was required to pay their best efforts

    • CathyMoran says:

      They’ve got to pay the larger of *best efforts*, *liquidation premium*, or what’s necessary to pay *priority claims*.

      If best efforts is the largest number, that’s what they pay into the plan. If best efforts, per b-22 is smaller than what creditors would get in 7, then it’s the liquidation dividend that measures the payment.