While some chapter 13 filers have almost exclusively unsecured debt that they wish to repay in full, the majority of chapter 13 filers file under this chapter for one of the reasons listed above. Since they file for bankruptcy for these reasons, the treatment of their unsecured creditors is typically not their top priority. It is essential to observe, however, what unsecured creditors receive in a chapter 13 distribution.
The golden criterion for chapter 13 unsecured creditors is that they cannot be treated worse than they would have been in chapter 7. In some chapter 7 cases, unsecured creditors receive a distribution from the trustee, despite the fact that the overwhelming majority of chapter 7 cases are """"no asset"""" cases and unsecured creditors receive 0%.
This corresponds to the scenario described in number four. The debtor must choose between filing a chapter 7 and surrendering assets to the trustee or filing a chapter 13 and paying off the debt over time. In a chapter 13, the debtor must pay his unsecured creditors the excess exemption amount he retains, as this is the amount they would have received in a chapter 7 liquidation.
Suppose, for instance, that a debtor possesses a $25,000 automobile free and clear. In Georgia, a debtor could protect $3,500 in equity in a vehicle, plus whatever amount of wildcard equity remained, for example, $1,500. Therefore, the debtor's unprotected equity in the vehicle is $20,000. In a chapter 7 proceeding, the trustee could liquidate this vehicle to pay that amount to creditors. Therefore, if the debtor wishes to retain the vehicle in a Chapter 13 proceeding, he or she must pay at least this amount to the chapter 13's unsecured creditor pool. This calculation was based on Georgia exemption law; if you use exemption quantities from another state or from the federal government, the result will vary.
Commonly, the above calculation is referred to as a ""liquidation analysis"" because it is based on the amount your unsecured creditors would receive in a chapter 7 liquidation. The alternative method for determining how much your unsecured creditors could receive in a chapter 13 is to calculate your monthly disposable income using the chapter 13 means test.
The means test is used to determine whether and how much a debtor must pay monthly to the pool of unsecured creditors. The debtor must pay the larger of this amount or the amount determined by the liquidation analysis of the debtor.
Consequently, if the debtor's liquidation analysis was as described above and revealed that the debtor must pay $20,000 to the unsecured creditor pool, the debtor would be required to pay this amount even if it desired to keep the vehicle and had no disposable income to pay its unsecured creditors. In contrast, if the debtor was enrolled in a 60-month plan and had a monthly disposable income of $500, the means test disposable income calculation of $30,000 ($500 per month multiplied by 60 months) would be the amount the debtor must pay the unsecured creditor pool because it exceeds the $20,000 in the liquidation analysis.
Given that the debtor must also pay off other debts (priority creditors, secured creditors, and living expenditures), it is conceivable that he or she will be unable to fund the amount necessary to pay the unsecured creditor pool in the liquidation analysis. In such a scenario, it is unlikely that the debtor's plan will be approved, as it is unlikely that the debtor can make all of the required payments.
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