Tests for Chapter 13

Although the Bankruptcy Reform Act of 2005 blurred the tests under Chapter 13 to a certain extent, nevertheless, Trustees, creditors and courts look to these tests in order to determine whether or not a Chapter 13 plan is appropriate.

The first test to be aware of is the liquidation test. In other words, the unsecured creditors in a Chapter 13 case should be entitled to receive as much as they would receive if the debtors assets were liquidated, or sold. Therefore, the debtor, with the help of his attorney, must determine what the liquidation value of assets is and prepare the plan accordingly.

Although the disposable income test is no longer specifically part of the bankruptcy code, most bankruptcy Judges believe that a debtor should commit all of their disposable income to their Chapter 13 plan. Therefore, a debtor should pay to his creditors all the money which is not necessary to maintain the debtors' household and a basic standard of living.

Bankruptcy courts also take into account the good faith test. Good faith simply means absense of malice or any intention to deceive, good intentions, sincerity or honesty.  All Chapter 13 plans must be filed in good faith and failure to propose a plan of good faith will lead to dismissal of the case.

Home Mortgages

One of the debtor friendly tools in Chapter 13 has to do with home mortgages. If a debtor is behind on his or her mortgage, sometimes referred to as an arrearage, the bankruptcy code under Chapter 13 allows that debtor to "catch up" over a 3-5 year period. In other words, the debtor pays his monthly mortgage payment directly to the bank and a portion of the money paid to the Trustee goes to "catch up" the mortgage.

Car Loans

The method by which car loans are handled in Chapter 13 cases was changed in the Bankruptcy Reform Act of 2005. Routinely, car loans are paid by the Trustee and part of the money that the debtor pays to the Trustee covers the car loans. If a debtor bought his or her car less than 910 days before the filing of a bankruptcy, that car loan must be paid in full. If the debtor bought his or her car more than 910 days before the filing of the bankruptcy, the debtor only has to pay the value of the car as a secured debt through the bankruptcy plan, and can pay the balance at a discount as part of the payment to unsecured creditors.

Lien Stripping

In some cases, both in Chapter 7 and Chapter 13, liens on real estate may be "stripped off" or avoided (in bankruptcy terminology) if there is no equity to support them. For example, if a debtor has a $200,000 house with a $200,000 mortgage and a $20,000 judgment lien, that judgment lien can be stripped off in a Chapter 7 case and no payment to that creditor will be due. In a Chapter 13 case, the creditor will be paid as an unsecured creditor.

Car leases

As opposed to car loans, car leases are normally paid in chapter 13 plans directly to the leasing company and outside of the payments to the Trustee.

Payments to the Trustee

In a Chapter 13 case payments to the Trustee must begin immediately upon the filing of the case. That is considered to be "part of the deal."  In other words, if the bankruptcy court is going to allow you to stop the creditors from hounding you, to stop foreclosures and such, then, in good faith you should begin making payments immediately. Anytime a debtor fails to make payments to the trustee, it is cause for the trustee to ask that the case be dismissed. Most of the time, the chapter 13 payment comes out of the debtors pay check. However, if for some reason the employer fails to deduct the money or if the debtor is self-employed or on social security, the debtor must be sure the payment is made. It is no excuse that the employer failed to deduct.

Modification of Plan

A Chapter 13 Plan can be modified both before it is confirmed (approved) by the Court and after. Circumstances and objections of creditors or the Trustee may dictate a modification.

The Red Book

Any debtor who files a Chapter 13 Case in Cleveland will get a copy of "the Red Book". This booklet is prepared by Craig Shopneck, the Cleveland Chapter 13 Trustee and contains a wealth of information. 


                                                                           Chapter 13 Summary

The goal in Chapter 13 is to come up with a Plan that allows the debtor to pay back a portion of his debt within his budget. Most of the time, that plan provides for paying secured creditors in full and unsecured creditors at a percentage of the debt. Chapter 13 is a great tool for debtors who do not qualify for Chapter 7 or otherwise want to restructure their debt. 

Contact us for more information on Chapter 13 bankruptcy. 


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The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.