- posted: Feb. 15, 2026
- Chapter 13
Chapter 13 bankruptcy offers individuals a pathway to regain control over their finances by creating a court-approved repayment plan that lasts from three to five years. Unlike Chapter 7, where certain assets may be sold to pay off creditors, Chapter 13 allows debtors to keep their property while repaying some or all debts over time.
A central eligibility requirement for any Chapter 13 plan is the “best interests of the creditor” test. This rule is designed to ensure creditors are treated fairly, receiving at least as much as they would have already collected had the debtor filed for Chapter 7 bankruptcy instead. In this blog, we’ll break down what the “best interests of the creditor” test is, how it’s applied and what it means for those seeking Chapter 13 relief.
At its core, the “best interests of the creditor” test requires that a Chapter 13 plan pays each unsecured creditor at least as much as the creditor would have received in a hypothetical Chapter 7 liquidation. The test acts as a safeguard to prevent debtors from using Chapter 13 solely as a way to protect assets without offering creditors a fair return. The process starts by asking: If the debtor’s non-exempt property were sold under Chapter 7, what would creditors receive, after accounting for allowable exemptions that let debtors keep certain property? Only the value of non-exempt assets (those not protected by exemptions) counts toward what creditors could expect.
A “best interests” review follows this three-step process:
Calculate the value of non-exempt assets — Identify all property, then apply federal or state exemptions to determine which assets would be protected in a Chapter 7 case. The equity remaining in non-exempt property forms the pool available for creditors.
Estimate potential Chapter 7 distributions — Assess how much creditors would get if the non-exempt assets were sold and the proceeds paid out, minus administrative costs.
Ensure Chapter 13 compliance — The Chapter 13 repayment plan must provide unsecured creditors with at least this amount, spread over the plan period.
For example, if a debtor owns $20,000 in non-exempt equity across their assets, the plan must guarantee that at least $20,000 will be distributed to unsecured creditors over three to five years.
Debtors considering Chapter 13 must begin with a detailed exemption analysis to accurately determine potential liquidation value. A knowledgeable bankruptcy attorney can assist with calculating this amount and structuring a confirmable plan. Even with higher repayment requirements, Chapter 13 can offer significant advantages, such as saving a home or restructuring secured debt. Debtors should be prepared to adjust their plans if trustees or creditors challenge proposed payments.
At Marlin Branstetter Attorney at Law in Anaheim, I deliver effective legal support to Californians living with unmanageable debt and considering bankruptcy. Call me at 714-276-8589 or contact me online to schedule a free initial consultation.
