Bankruptcy Code 1325 Confirmation Requirements
A Chapter 13 repayment plan requires court approval based on specific legal standards. Learn how these rules ensure a plan is both viable and treats creditors fairly.
Filing for Chapter 13 bankruptcy involves creating a repayment plan to manage debts. This plan is not automatically approved and must undergo confirmation, where a judge determines if it meets specific standards. The governing statute for this approval is Section 1325 of the U.S. Bankruptcy Code. These requirements establish what a plan must contain before it is legally binding, ensuring it is fair and practical.
Core Confirmation Requirements
A Chapter 13 plan must be proposed in good faith. This means the plan is submitted with honesty for a legitimate purpose, not to manipulate the bankruptcy system or unfairly treat creditors. Good faith is assessed by looking at the totality of the circumstances, including the accuracy of financial information, the reasons for filing, and the effort made to repay debts. Actions like hiding assets or providing false income statements can be viewed as bad faith, leading to denial of confirmation.
Another requirement is feasibility, a practical test to ensure the debtor can financially complete the plan. The court examines the debtor’s budget, including all income and necessary living expenses, to verify sufficient, stable income to cover payments for the three-to-five-year duration. If the court finds the debtor’s income is unreliable or the budget is unrealistic, the plan will not be confirmed.
The debtor must pay all required court filing fees and administrative charges before the confirmation hearing. If the debtor has domestic support obligations, like child support or alimony, they must be current on all payments due after the case was filed. The debtor must also have filed all applicable federal, state, and local tax returns for the four-year period before the bankruptcy filing.
The Best Interests of Creditors Test
The “best interests of creditors” test is a key part of plan confirmation. It protects the financial interests of unsecured creditors, who are those without a claim to specific collateral. The test ensures these creditors receive at least as much under the Chapter 13 plan as they would in a Chapter 7 liquidation. This establishes a minimum payment threshold for the plan.
To apply this test, the court conducts a hypothetical Chapter 7 analysis. It calculates the value of assets that would be sold in a liquidation by identifying all property and subtracting any that is legally “exempt” under federal or state law. Exempt property, like a certain amount of equity in a home or vehicle, is protected from creditors.
The value of the remaining non-exempt property is what would be distributed to unsecured creditors in a liquidation. A Chapter 13 plan must propose to pay these creditors a total amount that is no less than this calculated value. This test guarantees that creditors are not put in a worse position than they would be in a Chapter 7 case.
Treatment of Secured Claims
A Chapter 13 plan must specify how it will handle secured claims, which are debts backed by collateral like a car loan or mortgage. The plan must satisfy one of three options for each secured creditor. The first option is for the secured creditor to accept the plan’s terms.
A second option is to surrender the collateral to the secured creditor. For example, a debtor can return a vehicle to the lender, which satisfies the secured portion of the debt. The creditor can then sell the asset to recover what is owed. If the sale proceeds are less than the loan balance, the remaining deficiency becomes an unsecured debt treated with other general unsecured claims.
The third option, a “cramdown,” allows the debtor to keep the collateral by paying the creditor through the plan. The plan must ensure the creditor retains their lien on the property until the debt is paid or the debtor receives a discharge. It must also provide payments with a present value equal to the collateral’s value, often by including an appropriate interest rate. This can allow a debtor to reduce a loan balance to the asset’s current market value, with the remainder treated as unsecured debt.
The Disposable Income Test
The disposable income test is not applied in every case; it is only triggered if the trustee or an unsecured creditor objects to the plan’s confirmation. An objection may arise if a creditor believes the debtor is not contributing enough available income to the plan. The test ensures debtors commit all reasonably available income to repaying creditors for a specified period.
“Projected disposable income” is the debtor’s current monthly income minus amounts reasonably necessary for the support of the debtor and their dependents. These expenses are often determined by national and local IRS standards. This income must be committed for the “applicable commitment period,” which is three years for debtors with below-median income and five years for those with above-median income.
If an objection is raised, the debtor has two ways to satisfy the test. The first option is to propose a plan that pays all allowed unsecured claims in full. The second option is to commit all projected disposable income for the entire applicable commitment period to the plan. The plan must satisfy whichever test—best interests of creditors or disposable income—results in a higher payment to unsecured creditors.