Cite as: Keith M. Lundin, Lundin On Chapter 13, § 90.1, at ¶ ____, LundinOnChapter13.com (last visited __________).
The best-interests-of-creditors test in § 1325(a)(4) requires that “the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim . . . [must be] not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under Chapter 7 of this title on such date.”1
To determine compliance with the test, a hypothetical liquidation of the debtor’s estate under Chapter 7 on the “effective date of the plan” must be compared to the value on “the effective date of the plan” of what the debtor proposes to distribute to the holders of allowed unsecured claims. Two mathematical calculations are required: (1) an estimate must be made of what would be available for distribution to unsecured claim holders in a Chapter 7 case; and (2) the distributions to unsecured claim holders under the proposed plan must be “present valued” (discounted) as of the effective date of the plan.2
The phrase “effective date of the plan” is not defined by the Code. Without directly deciding the question, most best-interests-of-creditors test cases perform the hypothetical liquidation as of the date of the Chapter 13 petition.
For other purposes such as valuation of collateral, a majority of the reported decisions conclude that the effective date of the plan means the date of confirmation.3 In Rake v. Wade,4 Justice Thomas stated that an oversecured mortgage holder is allowed postpetition interest on its claim under § 506(b) “until the confirmation or effective date of the plan.”5 Justice Thomas’s use of the disjunctive “or” suggests that confirmation is not necessarily the effective date of the plan in a Chapter 13 case. In a jurisdiction that substantially delays confirmation of Chapter 13 cases—for example, until after the claims bar date6—value at the date of the hearing on confirmation could be quite different than at the filing of the case months before.
Given that exemptions are typically determined in Chapter 13 cases as of the date of the filing7 and exemptions may affect the best-interests-of-creditors calculation,8 defining effective date as the petition date offers some consistency and avoids changes in value caused only by the vagaries of the court’s scheduling of confirmation. On the other hand, elsewhere in the Code, Congress demonstrated its ability to identify the date of the petition or the entry of the order for relief as the magic date for other consequences.9
Effective date of the plan is a phrase of art in Chapter 11 cases, often defined by the plan as the date of finality of the order of confirmation. The Chapter 13 debtor might control the definition of the effective date for best-interests-of-creditors-test purposes with a provision of the plan. The debtor’s strategy would be to pick the date at which the value of the liquidated estate would be lowest; creditors would argue otherwise. It would be advantageous to creditors to define the effective date of the plan for § 1325(a)(4) purposes as the date of confirmation if the debtor acquired an unencumbered asset after the petition or if property of the estate is appreciating. If the estate is depreciating in value, creditors will argue for the higher value at the petition.
Fixing the effective date of the plan for § 1325(a)(4) purposes becomes more complicated depending on whether the court uses § 541, § 1306 or a combination of the two to define the estate to be liquidated. Section 1325(a)(4) defines the least that must be distributed under the plan as not less than the amount that would be paid if the estate “were liquidated under Chapter 7 of this title on such date.”10 “Such date” refers to the phrase “the effective date of the plan” earlier in § 1325(a)(4). Liquidation under Chapter 7 for purposes of § 1325(a)(4) requires the bankruptcy court to determine property of the hypothetical Chapter 7 estate “as of the effective date of the plan.”
In a real Chapter 7 case, the bankruptcy court would look to § 541 of the Code to determine the content of the estate. Section 541 defines property of the bankruptcy estate with reference to “the commencement of the case.”11 In a Chapter 13 case, § 1306 expands the definition of property of the estate to include all property described in § 541 acquired by the debtor after the petition.12 Section 1306 would include in property of the Chapter 13 estate postpetition wages and other property acquired by the debtor after the petition.
For purposes of the hypothetical liquidation of the estate as of the effective date of the plan under § 1325(a)(4), does the bankruptcy court use the property that would be property of the estate under § 541 “as of the commencement of the case” or does the bankruptcy court include postpetition income and property under § 1306? If § 541 alone controls, then the estate might be determined as of the date of the petition, with the exception of the special property interests described in § 541(a)(5) that become part of the (Chapter 7) estate if acquired within 180 days after the petition.13 But § 541(a)(7) includes in the hypothetical Chapter 7 estate “[a]ny interest in property that the estate acquires after the commencement of the case.”14 Well, in a Chapter 13 case, consistent with § 1306, the estate acquires property interests continuously after the commencement of the case. If the court defines property of the estate for purposes of § 1325(a)(4) using § 541(a)(7) and § 1306, the hypothetical liquidation value would include the debtor’s income and earnings between the petition and the effective date of the plan, including any property acquired by the debtor after the petition.
Few reported § 1325(a)(4) cases address the interaction between §§ 541 and 1306 for purposes of the hypothetical liquidation under the best-interests-of-creditors test. In contrast, much ink has spilled discussing how §§ 541 and 1306 interact to define property of the estate at conversion from Chapter 13 to Chapter 7.15 Especially prior to the 1994 Code amendments,16 many courts reported cases that included § 1306 property in the Chapter 7 estate at conversion from Chapter 13 to Chapter 7.17 Some of these same courts have reported § 1325(a)(4) cases without discussing whether postpetition income and property are included in the hypothetical liquidation value of the estate.18 In the context of modification of a plan after confirmation, the Bankruptcy Appellate Panel for the Eighth Circuit held that § 1325(a)(4) applies only once as of the effective date of the original confirmed plan; thus, settlement proceeds received on account of a cause of action that arose after confirmation were not included in the hypothetical liquidation value of the estate.19
One reported bankruptcy court decision concludes that a postpetition cause of action is not property of the hypothetical Chapter 7 estate for purposes of the best-interests-of-creditors test. In Sumski v. Sanchez (In re Sanchez),20 the debtor was injured in a traffic accident after the Chapter 13 petition. The proposed 10 percent plan included no accounting for any recovery from the traffic accident. The bankruptcy court rejected a best-interests-of-creditors-test objection to confirmation: “In a Chapter 7 proceeding, the trustee would not be able to liquidate a personal injury cause of action that occurred post-petition. Accordingly, it should not be included as property of the estate for purposes of Chapter 7 hypothetical liquidation analysis in a Chapter 13 case.”21
This explanation makes sense only if “effective date of the plan” in § 1325(a)(4) means the date of the Chapter 13 petition. If effective date of the plan means the date of confirmation, then the postpetition personal injury claim existed and would be (hypothetically) available for liquidation.
If the Chapter 7 estate includes, for example, the money paid by the debtor to the trustee between the filing of the Chapter 13 case and conversion to Chapter 7—and it does according to some decisions22—then payments to the Chapter 13 trustee between the petition and the effective date of the plan are property of the estate in the hypothetical liquidation required at confirmation by § 1325(a)(4). Postpetition property acquired by the debtor between the petition and confirmation would also be captured for best-interests-of-creditors test purposes. Given the specificity of § 1325(a)(4)—“liquidation under Chapter 7 of this title on such date”—it is not unreasonable to ascribe intent that the estate liquidated for purposes of § 1325(a)(4) is the estate in existence at the effective date of the plan. The simplest interpretation of this language is to imagine the filing of a Chapter 7 case on “the effective date of the plan.” Such a filing would create an estate under § 541 that includes all property that accumulated between the (earlier) filing of the Chapter 13 case and the effective date of the plan.
This analysis has curious side effects. With the passage of time, as the debtor makes the payments to the trustee required by § 1326(a),23 the hypothetical liquidation of the accumulating estate will produce a constantly changing dividend calculation.
An example might help. Imagine that at the filing of a Chapter 13 petition on January 1, the estate contained $5,000 of nonexempt assets that would be available for distribution to creditors in a Chapter 7 case. The plan calls for payments to the trustee of $1,000 per month. The plan is confirmed on June 1, and June 1 is the effective date of the plan. Because of depreciation, the nonexempt property that the debtor had at the petition would only produce $2,000 upon liquidation on June 1, the effective date of the plan. Finally, assume that the debtor made six required payments between January 1 and June 1, and thus at the effective date of the plan, the trustee was holding $6,000 in anticipation of confirmation.
For purposes of the best-interests-of-creditors test in § 1325(a)(4), what is the least that the debtor has to pay as of the effective date of the Chapter 13 plan (June 1)? If the hypothetical liquidation test is based on the property included by § 541 in a Chapter 7 estate at the filing of the original Chapter 13 petition, then the estate available for unsecured claim holders would be $5,000. If liquidation as of the effective date of the plan means act as if a Chapter 7 petition was filed at the effective date of the plan, then the best-interests-of-creditors test would only require a minimum payment of $2,000, the depreciated value of the estate on June 1, unless the $6,000 held by the Chapter 13 trustee is included in the hypothetical Chapter 7 estate. Based on the conversion cases referenced above, some courts would include the $6,000 held by the trustee in the property to be liquidated as of the effective date of the plan, boosting the minimum requirement to $8,000. Other mathematical outcomes are possible depending on how §§ 541 and 1306 interact.
The liquidation test in § 1325(a)(4) contains many unanswered questions that could produce dramatically different outcomes on not so unusual fact patterns. In jurisdictions that delay confirmation,24 the passage of time may change the value of assets and may result in the accumulation of substantial funds in the hands of the Chapter 13 trustee. Some would say it is odd to “penalize” debtors at confirmation by interpreting § 1325(a)(4) to increase the amount that must be paid to accomplish confirmation with each payment to the trustee. The instruction in § 1326(a)(2) that the accumulated funds be refunded to the debtor (net of administrative claims under § 503(b)) if no plan is confirmed is some support for this argument.25 Others would say it is appropriate for the passage of time to work to the benefit of unsecured creditors in just this way.
Mathematics and valuation are important to the best-interests-of-creditors test. If unsecured claim holders would receive nothing in a hypothetical liquidation under Chapter 7, then § 1325(a)(4) does not require that they receive any payment in the Chapter 13 case.26 A debtor’s proposal to pay $154 to unsecured claim holders can satisfy the best-interests-of-creditors test when, after careful valuation of the debtor’s real and personal property, liquidation of the estate would pay $150 to unsecured claim holders in a Chapter 7 case.27 A plan that contributes exempt assets and income totaling $998,114 satisfies the best-interests-of-creditors test when a Chapter 7 trustee would not be able to liquidate the exempt assets and would only distribute $517,856 to creditors in a Chapter 7 case.28 After valuing an annuity and notes payable to the debtor, “each unsecured creditor is projected to receive a 23.76% dividend over the life of the chapter 13 plan. In a chapter 7 liquidation, these creditors would receive only a 4% dividend . . . . [Section] 1325(a)(4) is satisfied.”29 A debtor’s proposal to pay $26,100 to unsecured claim holders satisfies § 1325(a)(4) when the liquidation value of the estate would be between $17,300 and $19,300.30 Five thousand dollars to unsecured claim holders satisfies the test when the realistic return in a Chapter 7 case would be $3,400.31 The plan satisfies the best-interests-of-creditors test in § 1325(a)(4) when the debtor proposes to pay $5,965.81 to unsecured claim holders and at most the debtor’s assets would be worth $5,140 before exemptions in a Chapter 7 case.32 The plan fails the best-interests-of-creditors test when unsecured claim holders would receive $18,587 in a Chapter 7 liquidation, but the plan proposes to pay only $11,255 over 60 months.33
Plans that pay a fixed percentage to unsecured claims must be compared to the percentage of unsecured claims that would be paid in a Chapter 7 liquidation. Distributions under the proposed Chapter 13 plan must be present valued to the effective date of the plan using an appropriate discount rate.34 This calculation can be difficult because the parties have to estimate when payments will be made under the plan and in what amounts to accurately calculate a present value for the stream of payments under the plan. Few of the reported decisions reveal the exact discount rates used or other assumptions underlying the conclusion that a plan satisfies § 523(a)(4). For example, without revealing the basis for its calculation, one bankruptcy court concluded that a 33 percent dividend through the Chapter 13 plan over 60 months satisfies § 1325(a)(4) because in a liquidation, unsecured claim holders would receive 28 percent.35 The 5 percent difference between 28 percent and 33 percent translates into approximately 18 percent difference over five years. Any simple discount rate over approximately 4 percent would fully exhaust this difference in the five years of the Chapter 13 plan.
A “base” plan that does not specify a minimum percentage of payment to unsecured claim holders fails the best-interests-of-creditors test. A base plan is a plan that specifies the amount of money that will be paid to the trustee each month and specifies the length of the plan but is not specific with respect to the percentage of unsecured claims that will ultimately be paid.36 A base plan informs creditors of the total amount of money that the debtor will pay to the trustee, but from that total, claims with higher priorities than unsecured claims must be deducted and the total of allowed unsecured claims (with interest) must be known before a percentage of payment through the plan can be calculated. The best-interests-of-creditors test requires comparison of distributions under the plan to distributions in a hypothetical Chapter 7 case, and this comparison is impossible when the only information provided is the “base” that the debtor will pay to the trustee. As explained by the bankruptcy court in In re Jones:37
[T]o determine whether general unsecured creditors are receiving more than they would receive under Chapter 7, a specified dividend must be promised to them. . . . The Plan cannot be confirmed because it fails to give general unsecured creditors notice of how much they are likely to receive and because it cannot be determined whether the plan will pay the unsecured creditors what they would receive in a Chapter 7.38
Plans that classify unsecured claims for unequal treatments and plans that surrender property or “settle” claims with specified creditors may run afoul of the best-interests-of-creditors test. For example, a plan that separately classified nondischargeable student loans for 100 percent payment, with no payment to other unsecured claim holders, failed the best-interests-of-creditors test because, upon liquidation in a Chapter 7 case, $4,450 of nonexempt property would be available for pro rata distribution to all unsecured creditors.39 When the debtor proposed to surrender encumbered property in full satisfaction of the claims of undersecured creditors, the plan failed the best-interests-of-creditors test because those creditors would realize payments on account of the unsecured portions of their claims in a Chapter 7 case.40 The debtor’s proposal to distribute to specified creditors $51,000 received from settlement of a lawsuit, with the balance to the Chapter 13 trustee, failed the best-interests-of-creditors test because, in a Chapter 7 case, the entire $51,000 would have been available for equal distribution to all unsecured claim holders.41
Figuring out what claims would be allowed and paid and in what order in a hypothetical Chapter 7 case can be outcome determinative whether the Chapter 13 plan satisfies § 1325(a)(4). One example, discussed more below,42 is the allowance of some tardily filed claims in Chapter 7 cases—claims that would not be allowable in a Chapter 13 case. Another example is the way the priorities for distribution in a Chapter 7 case in § 726 affect the best-interests-of-creditors test calculation by specifying the order in which a liquidated estate would be distributed.
The Bankruptcy Reform Act of 1994 changed the best-interests-of-creditors test calculation by changing the priorities of unsecured claims. Both before and after the 1994 amendments, the priorities in § 726 affect the test in § 1325(a)(4) by entitling some creditors to distributions in a Chapter 7 case ahead of allowed unsecured claims.43 The 1994 Act amended § 507(a)(7) to provide that most debts for alimony, maintenance or support are entitled to a seventh priority of distribution (ahead of taxes and many other priority claims) in bankruptcy cases filed after October 22, 1994.44 Because of this new priority, the amount that would be paid to nonpriority unsecured claim holders in a hypothetical Chapter 7 case for purposes of the best-interests-of-creditors test is reduced by the amount that must now first be paid to priority alimony, maintenance or support debt.
Determining exactly what property becomes property of the estate45 and at what liquidation value can determine whether the debtor satisfies the best-interests-of-creditors test in § 1325(a)(4). For example, in In re Schyma,46 the debtor was a partner in a farming operation. The issue under § 1325(a)(4) was whether a nondebtor partner’s property had been transferred to the partnership, thus enhancing the hypothetical liquidation value of the debtor’s interest in the partnership. The court determined that the other partner’s assets had not been transferred to the partnership and therefore did not increase the debtor’s estate under § 1325(a)(4).
Valuing stock in a closely held corporation is a recurring problem in § 1325(a)(4) cases. Confirmation has been denied when the debtor failed to prove that stock would liquidate for less than the payments proposed to unsecured claim holders through the Chapter 13 plan.47
The best-interests test was failed when the hypothetical Chapter 7 estate would include a nondebtor spouse’s interest in jointly owned real estate that could be sold pursuant to § 363(h), realizing more than the debtor proposed to pay to unsecured claim holders through the Chapter 13 plan.48 Because the debtor’s one-third interest in a real estate partnership would be liquidated and distributed to unsecured claim holders in a (hypothetical) Chapter 7 case, a Chapter 13 debtor’s failure to account for the value of that interest through the proposed plan was fatal of confirmation.49 A Chapter 13 debtor’s right to receive payments totaling $220,000 over 30 years pursuant to the structured settlement of a prepetition automobile accident was property of the Chapter 13 estate with a present value of $74,000; the debtor’s proposal to pay $10,800 over the three-year life of the plan failed the best-interests-of-creditors test.50
The standard for valuing property for purposes of § 1325(a)(4) has been the subject of few reported decisions. Intuitively, because the purpose of the valuation is a hypothetical liquidation in a Chapter 7 case, property should be valued at what a Chapter 7 trustee would get—liquidation, foreclosure or forced sale value. In In re Gallup,51 the bankruptcy court valued an unencumbered car for purposes of § 1325(a)(4) at retail because, at the time, the U.S. Court of Appeals for the Eighth Circuit used retail value as the standard at cramdown under § 1325(a)(5).52 The bankruptcy court explained its retail valuation was driven by a concern for uniformity at confirmation:
[T]o adopt the principle that the valuation should be different for the . . . creditor than it is for the Trustee creates a disparity that this Court declines to adopt. Common sense dictates that if retail value is the proper measure when a creditor . . . is involved that same standard should be used for 11 U.S.C. § 1325(a)(4) when a Trustee raises the issue. . . . If the debtor retains possession of the collateral, the debtor must pay (whether it be to an oversecured or undersecured creditor, or to the standing Chapter 13 Trustee for 11 U.S.C. § 1325(a)(4) considerations) the retail value.53
Discussed in detail elsewhere,54 after the Eighth Circuit adopted a retail valuation standard for purposes of § 1325(a)(5), the Supreme Court in Associates Commercial Corp. v. Rash,55 held that replacement value was the rule at cramdown under §§ 506(a) and 1325(a)(5)(B)(ii). The Supreme Court rested its selection of replacement value in large part on the fact that the debtor in Rash proposed to retain possession and use the tractor trailer to produce income.
It is not obvious that the replacement value standard announced in Rash should control the valuation of property for purposes of a hypothetical liquidation under § 1325(a)(4). The uniformity concerns stated in Gallup collide with the Supreme Court’s holding that § 506(a) requires valuation focused on the “disposition or use” of the property. Section 506(a)—the center of attention in Rash—will not always be implicated in best-interests-of-creditors-test analysis. The logic of Rash leads away from replacement value and points to liquidation value as the appropriate standard under § 1325(a)(4).
The potential avoidance of liens or recovery of property in a hypothetical Chapter 7 case may affect the best-interests-of-creditors test calculation at confirmation of a Chapter 13 plan. For example, in In re Sitarz,56 the debtor embezzled from a former employer and disposed of the stolen money by making gifts and other questionable transfers to friends. The debtor’s plan proposed a 7 percent dividend to unsecured claims. A creditor argued that the best-interests-of-creditors test prohibited confirmation because § 1325(a)(4) included in the hypothetical estate recovery of the gifts and other transfers. The court denied confirmation on bad-faith grounds57 but rejected the best-interests-of-creditors test argument because the creditor failed to prove likelihood of success in lawsuits against the debtor’s friends:
There is no demonstrated thought as to how the prosecution of such claims would work into the administration of the Chapter 13 estate—how long the litigation would take, or how the Debtor or the estate would pay for it. . . . Common sense would suggest that the money is gone forever, and that the recipients would not or could not respond to any judgment which the debtor might obtain. . . . [T]he Debtor’s Chapter 7 estate would bear no assets.58
The creditor’s argument in Sitarz was well conceived: the recovery of property and the avoidance of liens must be considered in the best-interests-of-creditors test calculation at confirmation of a Chapter 13 plan.59 It is likely that the court in Sitarz would have sustained the § 1325(a)(4) argument had the creditor produced proof that avoidable transfers could be recovered by a Chapter 7 trustee. When another bankruptcy court concluded that a hypothetical Chapter 7 trustee would “likely succeed” in recovering a fraudulent conveyance that was not accounted for in payments through the plan, the plan failed the best-interests-of-creditors test.60 One reported decision analyzes at length when the avoidance of liens in a hypothetical Chapter 7 case increases the amount that a Chapter 13 debtor must pay to satisfy § 1325(a)(4), including a discussion of how a debtor’s exemptions affect liquidation value in this context.61
For purposes of the hypothetical liquidation in § 1325(a)(4), after valuing all assets that would be available in a Chapter 7 case, it is appropriate to deduct the costs of liquidation, including trustee’s fees and other administrative expenses.62 The expenses of a hypothetical Chapter 7 liquidation include the capital gains taxes on the sale of a debtor’s residence; thus, for § 1325(a)(4) purposes it is also appropriate to deduct those taxes.63 These amounts will have to be estimated. The net after deduction of all likely expenses of administration is the amount “that would be paid” in § 1325(a)(4). In one reported decision, the costs of sale and capital gains taxes that would be payable in a hypothetical liquidation were so great that the court concluded a Chapter 7 trustee would abandon the debtor’s property rather than sell it and the resulting estate would liquidate for more than the debtors proposed to pay through the plan.64 The Bankruptcy Appellate Panel for the Tenth Circuit has carefully explained that the administrative expenses deducted to determine hypothetical liquidation value under § 1325(a)(4) do not include the administrative expenses of the Chapter 13 case.65
The Supreme Court may have clouded the best-interests-of-creditors test calculation in its opinion in Dewsnup v. Timm.66 Dewsnup holds that a Chapter 7 debtor cannot use § 506(d) to void the lien of an undersecured mortgage to the extent the debt exceeds the value of the property. With respect to the best-interests-of-creditors test in Chapter 13 cases, Dewsnup may require that the lien of an undersecured mortgage holder somehow also secures the “unsecured” portion of the mortgage, notwithstanding § 506(a). One court has read Dewsnup to mean that in a hypothetical Chapter 7 liquidation, the undersecured mortgage holder would not have an unsecured claim, because the debtors could not use § 506(a) to bifurcate the mortgage holder’s claim.67 This leads to the conclusion that the undersecured mortgage holder would not receive payments on its (nonexistent) unsecured claim in a Chapter 7 case, and thus the best-interests-of-creditors test is not an obstacle to confirmation of a Chapter 13 plan that proposes no payment to the mortgage holder on account of the unsecured portion of its claim.
The majority opinion in Dewsnup is confusing and internally inconsistent. In one paragraph, the opinion states that a lien cannot be voided under § 506(d), notwithstanding the absence of value to secure the lien, because the claim “is secured by a lien and has been fully allowed pursuant to § 502.”68 A few paragraphs later, the majority acknowledges that an undersecured mortgage holder that files a claim will have “the benefit of an allowed unsecured claim as well as his allowed secured claim[.]”69 If after Dewsnup an undersecured mortgage holder still has both an allowable secured and an allowable unsecured claim, then the best-interests-of-creditors test protects the unsecured portion of the claim—it must be paid in the Chapter 13 case at least what it would be paid in a hypothetical Chapter 7 case. If Dewsnup means that the entire allowed claim of an undersecured mortgage holder is “secured” by its lien, notwithstanding § 506(a), then there is no separate unsecured claim that would receive distribution in a Chapter 7 case, and there is no unsecured claim that must be protected by the best-interests-of-creditors test in a Chapter 13 case. A plain reading of the Code leads to the conclusion that an undersecured mortgage holder has an unsecured claim that must be included in the best-interests-of-creditors test at confirmation in a Chapter 13 case. Dewsnup demonstrates that we cannot always count on the plain meaning of seemingly straightforward provisions of the Bankruptcy Code.
The schedules to Official Bankruptcy Form 670 are especially important for § 1325(a)(4) purposes. In most Chapter 13 cases, creditors and the trustee perform the hypothetical liquidation based on the values of assets and the debts listed in the schedules.71 If the debtor overvalues an asset or understates the amount of a debt in the schedules, the liquidation value of the estate may be enhanced for purposes of the best-interests-of-creditors test. The amount that must be paid to unsecured claim holders through the Chapter 13 plan increases accordingly.
1 11 U.S.C. § 1325(a)(4).
2 See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5 Discount Rates and Interest If Liquidation Would Produce Dividend. See also § 111.1 [ “Value, As of the Effective Date of the Plan” Means Interest ] § 77.1 “Value, As of the Effective Date of the Plan” Means Interest.
3 See § 107.1 [ As of What Date Is Value Determined? ] § 76.3 As of What Date Is Value Determined?. See, e.g., In re Cook, 38 B.R. 870 (Bankr. D. Utah 1984) (For purposes of § 1325(a)(5)(B)(ii), the value of collateral as of “the effective date of the plan” means as of the date of confirmation.).
4 508 U.S. 464, 113 S. Ct. 2187, 124 L. Ed. 2d 424 (1993).
5 508 U.S. at 471. See § 116.1 [ Oversecured Claim Holders ] § 78.5 Oversecured Claim Holders and 134.1 [ In General: Rake and Contracts before October 22, 1994 ] § 83.1 In General: Rake and Contracts before October 22, 1994.
6 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
8 See § 161.1 [ Exemption Issues ] § 90.2 Exemption Issues.
9 See, e.g., 11 U.S.C. §§ 348(d); 1305(a)(2).
10 11 U.S.C. § 1325(a)(4).
11 11 U.S.C. § 541(a).
12 11 U.S.C. § 1306. See § 45.1 [ What Is Property of the Chapter 13 Estate? ] § 46.1 What Is Property of the Chapter 13 Estate?. See also § 68.2 [ Additional Protection for Postpetition Property and Income ] § 58.3 Additional Protection for Postpetition Property and Income.
13 Section 541(a)(5) provides as follows:
(a) The commencement of a case under section 301, 302, or 303 of this title creates an estate. Such estate is comprised of all the following property, wherever located and by whomever held: . . .
(5) Any interest in property that would have been property of the estate if such interest had been an interest of the debtor on the date of the filing of the petition, and that the debtor acquires or becomes entitled to acquire within 180 days after such date—
(A) by bequest, devise, or inheritance;
(B) as a result of a property settlement with the debtor’s spouse, or of an interlocutory or final divorce decree; or
(C) as a beneficiary of a life insurance policy or of a death benefit plan.
14 11 U.S.C. § 541(a)(7).
15 See §§ 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1 In Cases Filed before October 22, 1994 and 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994. This controversy led Congress to enact 11 U.S.C. § 348(f) in 1994 to clarify property of the estate upon conversion from Chapter 7 to Chapter 13. See also 11 U.S.C. § 348(f), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 311, 108 Stat. 4106 (1994), discussed in § 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994.
16 See § 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1 In Cases Filed before October 22, 1994.
17 See §§ 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1 In Cases Filed before October 22, 1994 and 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994.
18 Compare Resendez v. Lindquist, 691 F.2d 397 (8th Cir. 1982) (Funds held by trustee in a confirmed Chapter 13 case become property of the Chapter 7 estate upon conversion and are not subject to exemption.), with Education Assistance Corp. v. Zellner, 827 F.2d 1222 (8th Cir. 1987) (Without discussion of the interaction of §§ 541 and 1306, bankruptcy court’s failure to consider whether retirement fund was property of the estate and/or subject to exemption was harmless error because even if retirement fund was available for distribution to creditors in a Chapter 7 liquidation, the amount proposed to be distributed through the Chapter 13 plan exceeded the liquidation dividend and the best-interests-of-creditors test was satisfied.).
19 Forbes v. Forbes (In re Forbes), 215 B.R. 183, 188–90 (B.A.P. 8th Cir. 1997) (Modified plan satisfies best-interests-of-creditors test because the “effective date of the plan” for § 1325(a)(4) purposes is the effective date of the original confirmed plan and settlement proceeds received on account of postpetition cause of action are not included in hypothetical liquidation analysis. “For so long as it exists in bankruptcy, there is, at any given time, only one effective plan; the plan is an [sic] unitary constant. . . . The language contained within Section 1325(a)(4) concerning the valuation date under the test ‘as of the effective date of the plan’ and ‘on such date’–has been the source of significant controversy among courts and commentators alike. . . . Regarding the effective date of the plan, there is only one plan. The effective date is not altered by modification of the plan, for the modified plan remains, ever constant, the plan. . . . [I]t is sufficient for the resolution of the issues before us that the Eighth Circuit in [Hollytex Carpet Mills v. Tedford, 691 F.2d 392 (8th Cir. 1982),] expressly rejected the suggestion that the ‘effective date of the plan’ constitutes the date of postconfirmation modification. . . . In the instant matter, the cause of action, from which Robert ultimately received settlement proceeds, arose post-petition. Accordingly, it would not be included in property of the estate for purposes of the liquidation analysis under the best interests of creditors test. . . . [I]t was not error for the bankruptcy court to disregard the settlement in conducting the best interests of creditors test pursuant to Section 1325(a)(4).”).
20 270 B.R. 322 (Bankr. D.N.H. 2001).
21 270 B.R. at 324–25.
22 See §§ 315.1 [ In Cases Filed before October 22, 1994 ] § 143.1 In Cases Filed before October 22, 1994 and 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994.
23 See discussion beginning at § 44.1 First Test of Debtor’s Good Intentions.
24 See § 216.1 [ Timing of Hearing on Confirmation ] § 115.1 Timing of Hearing on Confirmation before BAPCPA.
25 See §§ 43.5 [ Return of Payments to Debtor ] § 44.5 Return of Payments to Debtor, 316.1 [ In Cases Filed after October 22, 1994 ] § 143.2 In Cases Filed after October 22, 1994 and 338.1 [ In General ] § 153.1 In General.
26 See In re Dornon, 103 B.R. 61 (Bankr. N.D.N.Y. 1989) (Plan satisfies best-interests-of-creditors test where there will be some distribution under the plan and a zero dividend would be payable in a Chapter 7 case.); In re Greer, 60 B.R. 547 (Bankr. C.D. Cal. 1986); In re Red, 60 B.R. 113 (Bankr. E.D. Tenn. 1986).
27 In re Chapman, 51 B.R. 663 (Bankr. D.D.C. 1985).
28 In re Lapin, 302 B.R. 184 (Bankr. S.D. Tex. 2003). See § 161.1 [ Exemption Issues ] § 90.2 Exemption Issues for further discussion of exempt assets and the best-interests-of-creditors test.
29 In re Martin, 233 B.R. 436, 445 (Bankr. D. Ariz. 1999).
30 In re Caldwell, 67 B.R. 296 (Bankr. E.D. Tenn. 1986).
31 In re Jernigan, 130 B.R. 879 (Bankr. N.D. Okla. 1991).
32 In re Murrell, 160 B.R. 128 (Bankr. W.D. Mo. 1993). Accord Bank One, Chicago, NA v. Flowers, 183 B.R. 509, 518 (N.D. Ill. 1995) (Plan satisfies § 1325(a)(4) that pays the present value of a car ($16,000), plus 10% of the undersecured car lender’s unsecured claim, for a total of $16,460. In a Chapter 7 case, the creditor would either get its car, worth $16,000, or would be paid $16,000 in cash as a redemption under § 722. A mathematical comparison reveals, “[I]t is obvious that the unsecured creditor in fact does better under Chapter 13 than under Chapter 7.”); In re Johnson, 262 B.R. 831 (Bankr. D. Idaho 2001) (Plan satisfies § 1325(a)(4) because liquidation of the debtor’s specialized sign-making equipment would not provide a greater dividend in a Chapter 7 case.); In re Tibbs, 242 B.R. 511 (Bankr. N.D. Ala. 1999) (Twenty-two percent distribution satisfies § 1325(a)(4) because in a Chapter 7 case, after exemptions, unsecured creditors would receive 11% of claims.); In re Allard, 196 B.R. 402, 416 (Bankr. N.D. Ill.) (The best-interests-of-creditors test is satisfied where $27,756.80 would be available to unsecured claim holders in a Chapter 7 case and plan will distribute $33,605.76. “This figure is more than the unsecured creditors would receive if the Debtor were liquidated under Chapter 7.”), aff’d, 202 B.R. 938 (N.D. Ill. 1996); In re Cox, 186 B.R. 744, 747 (Bankr. N.D. Fla. 1995) (“[T]he total liquidation value of the assets available to non–student loan unsecured creditors would be $4475.00. Since these creditors would receive a total of $4816.84 under the debtors’ amended plan, the plan meets the § 1325(a)(4) liquidation test.”).
33 In re Knipping, 40 B.R. 865 (Bankr. W.D. La. 1984). Accord In re Barnes, 275 B.R. 889 (Bankr. E.D. Cal. 2002) (Plan fails best-interests-of-creditors test when after deducting trustee’s fees, priority claims and administrative expenses, $63,862.05 would be available for unsecured creditors in a Chapter 7 case and Chapter 13 plan would pay an estimated dividend of $13,712 over 60 months.); In re Agresta, No. 5-97-01568, 2000 WL 1639570 (Bankr. M.D. Pa. May 24, 2000) (After conversion to Chapter 13, court sustains Chapter 7 trustee’s objection to plan because liquidation value of the debtor’s interest in a mortgage would exceed $60,000 and the plan would distribute only $13,020.); Brugger v. Brugger (In re Brugger), 254 B.R. 321 (Bankr. M.D. Pa. 2000) (Plan fails best-interests-of-creditors test because debtor’s business is worth more than the debtor proposes to pay through the plan.); In re Carter, 250 B.R. 454 (Bankr. S.D. Ga. 2000) (Plan fails test in § 1325(a)(4) because in a Chapter 7 case, unsecured claim holders would be paid in full with interest under § 726(a)(5) from liquidation of real properties.); In re Miller, 247 B.R. 795 (Bankr. W.D. Mo. 2000) (Plan that pays $548 per month for 36 months fails the best-interests-of-creditors test because debtors have $77,500 in nonexempt equity in their assets.).
34 See § 162.2 [ Discount Rates and Interest If Liquidation Would Produce Dividend ] § 90.5 Discount Rates and Interest If Liquidation Would Produce Dividend.
35 In re McKown, 227 B.R. 487 (Bankr. N.D. Ohio 1999).
36 See § 170.1 [ Methods of Paying Unsecured Claims ] § 101.3 Methods of Paying Unsecured Claims.
37 301 B.R. 840 (Bankr. E.D. Mich. 2003).
38 301 B.R. at 844–45.
39 In re Tucker, 130 B.R. 71 (Bankr. S.D. Iowa 1991). Accord In re Battista, 180 B.R. 355, 357 (Bankr. D.N.H. 1995) (It is unfair discrimination to pay general unsecureds less than they would receive in a Chapter 7 case. Plan pays separately classified co-signed debts 100% and general unsecureds 6%. Five thousand dollars would be available to unsecured creditors in a liquidation. “[A]uthority is split on whether the ‘however’ clause is a carve-out from the unfair discrimination test. . . . [T]he better view is that the unfair discrimination standard applies to plans that separately classify cosigned consumer debts. . . . Here, the classification proposed by the debtor will result in receipt of a six percent distribution to the holders of the non-codebtor unsecured claims in Class F. In a chapter 7 liquidation, those creditors would receive a distribution of approximately 17%. This result is not only unfairly discriminatory . . . but also an independent basis for denying confirmation under section 1325(a)(4).”). But see In re Janssen, 220 B.R. 639 (Bankr. N.D. Iowa 1998) (Plan satisfies best-interests-of-creditors test because 19% dividend payable through plan exceeds 4.6% dividend that unsecured claim holders would receive in a Chapter 7 case notwithstanding that debtor separately classified unsecured claims co-signed by her father for full payment through the plan.).
40 In re Claypool, 122 B.R. 371 (Bankr. W.D. Mo. 1991).
41 In re McCullough, 120 B.R. 425 (Bankr. S.D. Ohio 1990).
42 See § 162.1 [ Nondischargeable Claims, Guaranteed Claims and Tardy Claims ] § 90.4 Nondischargeable Claims, Guaranteed Claims and Tardy Claims.
43 See, e.g., In re Smith, 196 B.R. 565 (Bankr. M.D. Fla. 1996) (Because secured and priority claims exceed the amount that would be available for distribution in a hypothetical liquidation, the best-interests-of-creditors test is satisfied in a Chapter 13 case notwithstanding that the plan does not propose to pay interest to unsecured claim holders.).
44 11 U.S.C. § 507(a)(7), as amended by Bankruptcy Reform Act of 1994, Pub. L. No. 103-394, § 304, 108 Stat. 4106 (1994). See § 301.1 [ Alimony, Maintenance and Support in Cases Filed after October 22, 1994 ] § 136.20 Alimony, Maintenance and Support in Cases Filed after October 22, 1994.
45 See discussion of property of the estate beginning at § 46.1 What Is Property of the Chapter 13 Estate?.
46 68 B.R. 52 (Bankr. D. Minn. 1985).
47 In re Vaughn, 28 B.R. 550 (Bankr. S.D. Ohio 1983). Accord In re McLaughlin, 217 B.R. 772, 778–80 (Bankr. W.D. Tex. 1998) (“Paltry” distribution to unsecured claim holders fails best-interests-of-creditors test where debtors own a health care business that would liquidate at a substantial sum in a Chapter 7 case. The best-interests-of-creditors test “requires the debtor to establish the net present value of the payment that McLaughlin’s plan proposes to make on the judgment debt to Williams. That number must then be compared to what Williams might receive were McLaughlin’s and Short’s estates to be liquidated in chapter 7.” Debtor proposed to pay $2,455 toward a $153,423.38 judgment for breach of fiduciary duties; companion debtor proposed to pay $1,311 toward similar judgment for $131,633.06. Without discounting, these proposals amounted to 1.6% and 1% of the prepetition judgments. Debtors owned stock in a not-for-profit health care business and were owed notes by that business. Expert testimony indicated that the health care company would liquidate for between $200,000 and $290,000. A liquidation value of $200,000 would pay 60% of McLaughlin’s unsecured debts and 53% of Short’s, “considerably more than the 14% McLaughlin’s and the 4% Short’s plan proposes to pay unsecured claims overall, and far more than the 1.6% and 1% respectively, their plans propose to pay Williams.”); In re Clements, 185 B.R. 903, 908 (Bankr. M.D. Fla. 1995) (Thirty-six monthly payments of $600 for a total of $21,600 fails the best-interests-of-creditors test where liquidation of the debtors’ interest in a closely held corporation would produce at least $51,000. “The only non-exempt assets Debtors listed on their schedules is [sic] 500 shares of stock in . . . the restaurant owned by the Debtors’ son. . . . The Debtors valued the stock themselves in their schedules at a total of $126,000. [The son] valued the stock much lower, but still stated a value of $51,000. Both of these figures are far higher than the Debtors’ proposed payments.”); In re Tobiason, 185 B.R. 59, 65 (Bankr. D. Neb. 1995) (Debtor’s (undisclosed) interest in a stock option defeats confirmation because “the debtor has failed to prove that the best interests of creditors test of § 1325(a)(4) is satisfied in this case.” Debtor asserted that restrictions on exercise of stock option made it valueless. “I conclude that the stock option may have some value despite the restrictions upon transfer of the underlying stock.”).
48 In re Sotter, 28 B.R. 201 (Bankr. S.D.N.Y. 1983). See also Van Der Heide v. LaBarge (In re Van Der Heide), 219 B.R. 830 (B.A.P. 8th Cir. 1998) (Proposal to pay unsecured creditors $2,858 fails best-interests-of-creditors test because Chapter 7 trustee would liquidate both the debtor’s interest and his nonfiling spouse’s interest in entireties property resulting in a distribution of at least $14,595 to joint creditors.), rev’d, 164 F.3d 1183 (8th Cir.), on remand, 231 B.R. 723 (B.A.P. 8th Cir. 1999). But see In re Nahat, 278 B.R. 108 (Bankr. N.D. Tex. 2002) (Failure to include nonfiling spouse’s earnings and separate debts in plan does not fail best-interests-of-creditors test in § 1325(a)(4) because nonfiling spouse’s postpetition income is not property of the Chapter 13 estate and remains in her separate control with respect to her separate debts under Texas community property law.).
49 In re Doddy, 164 B.R. 276, 279 (Bankr. S.D. Ohio 1994) (Applying Ohio law, the debtor’s interest in the partnership is personal property although the partnership property itself would be excluded from the debtor’s Chapter 13 estate. The filing of the Chapter 13 case dissolved the partnership, and only the “mechanical step” of winding up the partnership stands between the debtor and liquidation of the debtor’s interest in the partnership. “[The] debtor’s estate for purposes of liquidation analysis should include any distribution to which debtor will be entitled upon completion of that [winding up]. . . . The court thus must estimate the value of the surplus debtor will receive after liabilities to partnership creditors are paid, in order to determine whether the proposed plan meets the ‘best interests of creditors’ test set forth in § 1325(a)(4).”). Accord Premier Capital Funding, Inc. v. Earle (In re Earle), Case No. 01-15875, Adv. No. 02-1053 (Bankr. S.D. Ala. May 13, 2002) (Text available at www.alsb.uscourts.gov) (Plan fails best-interests-of-creditors test because debtors undervalued one-fifth interest in a trust that owned valuable real estate. “Mrs. Earle has a one-fifth remainder interest as trust beneficiary in the two parcels of property held by the Gonzales Trust. . . . [I]f the Point Clear property in a chapter 7 was sold via partition sale or equivalent proceeding for $400,000, the bankruptcy estate would realize a gross of $80,000 for Mrs. Earle’s one-fifth interest. No homestead exemption would be available to Mrs. Earle for her interest in this parcel. . . . Mrs. Earle’s one-fifth interest in the Gonzales Trust—if liquidated in a chapter 7—is far more valuable than $5,000 (which is what Mrs. Earle believes it is worth). After a trustee paid any expenses associated with a suit for division and sale, unsecured creditors . . . would receive at least some distribution on their claims . . . which is more than unsecureds would receive if the Earles’ zero percent chapter 13 plan is confirmed. . . . Consequently, the plan fails to comply with § 1325(a)(4).”).
50 In re Myers, 200 B.R. 155 (Bankr. N.D. Ohio 1996). Accord In re Britton, 288 B.R. 170 (Bankr. N.D.N.Y. 2002) (28% plan fails best-interests-of-creditors test because debtors’ right to receive $132.27 per month for 30 years as settlement for a personal injury action would be property of a Chapter 7 estate and the value of that stream of payments is not included in the plan dividend.).
51 194 B.R. 851 (Bankr. W.D. Mo. 1996).
52 See In re Trimble, 50 F.3d 530 (8th Cir. 1995), discussed in § 108.1 [ Valuation in Chapter 13 Cases before Rash ] § 76.4 Valuation in Chapter 13 Cases before Rash.
53 194 B.R. at 852.
54 See § 109.1 [ Rash and Valuation ] § 76.5 Rash and Valuation.
55 520 U.S. 953, 117 S. Ct. 1879, 138 L. Ed. 2d 148 (1997).
56 150 B.R. 710 (Bankr. D. Minn. 1993).
57 See § 181.1 [ Prepetition Transfers and Transactions ] § 105.2 Prepetition Transfers and Transactions.
58 In re Sitarz, 150 B.R. at 720.
59 See In re Lapin, 302 B.R. 184 (Bankr. S.D. Tex. 2003) (That the debtor proposes to contribute all avoidance actions to funding the plan is one factor measured by the bankruptcy court to determine that the plan satisfied the best-interests-of-creditors test when there were substantial assets and causes of action that could be liquidated in a Chapter 7 case.).
60 In re Larson, 245 B.R. 609 (Bankr. D. Minn. 2000).
61 In re Brennan, 208 B.R. 448, 453–54 (Bankr. S.D. Ill. 1997) (When the trustee or debtor avoids an unperfected security interest, debtor may be entitled to an exemption in the avoided transfer; if the debtor is entitled to an exemption, avoidance may not increase entitlement of unsecured creditors in a hypothetical Chapter 7 case. In consolidated cases, trustee avoided liens under § 544 in household goods and debtors avoided other liens in household goods and in motor vehicles. Trustee claimed in all cases that avoidance of liens increased the amounts that the debtors had to pay to satisfy the best-interests-of-creditors test. “In the first set of cases, . . . the trustee avoided the creditors’ liens under § 544(a)(1) and recovered the previously encumbered property for the estate pursuant to § 550. . . . [Section] 522(g)(2) allows a debtor to exempt property recovered by the trustee under § 550 if the lien avoided is a nonpossessory, nonpurchase money security interest in personal property that could have been avoided by the debtor under § 522(f)(1)(B)—whether or not the lien was voluntarily granted. The property at issue . . . personal property constituting ‘household goods’—is included in the property described in § 522(f)(1)(B). Thus, this property could be exempted by the debtors following the trustee’s recovery in a hypothetical Chapter 7 case. . . . For this reason, the debtors’ Chapter 13 plan payments need not be increased following the trustee’s avoidance of liens in order to comply with the ‘best interests of creditors’ test of § 1325(a)(4). . . . In the next two cases, . . . the debtors rather than the trustee filed actions to avoid the creditors’ liens . . . . [A] debtor may assert the trustee’s avoiding powers, including § 544(a)(1), in order to preserve exemptions, although the debtor’s avoiding capacity is limited to liens that were not voluntarily granted by the debtor. . . . In [the next two cases], it could not be determined whether the liens were voluntarily imposed or, indeed, whether any liens existed at all, as the creditors failed to respond to the debtors’ complaints or to assert any defenses such as the debtors’ standing under § 522(h). The creditors’ defaults in each case resulted in the Court entering judgment avoiding their liens. Once the liens were avoided under § 522(h), the debtors became entitled to exempt the property so recovered pursuant to § 522(i) . . . . [I]f the trustee rather than the debtors had avoided these liens, the debtors could have exempted the recovered property to the extent it was personal property subject to a lien avoidable by the debtor under § 522(f)(1)(B). The property at issue . . . constitutes ‘household goods’ of the debtors that could have been exempted if the trustee had avoided the subject liens. In a hypothetical Chapter 7 case, therefore, the debtors would have been entitled to exempt this property under § 522(i)(1) following avoidance by the debtors under § 522(h). . . . Accordingly, the debtors’ Chapter 13 plan payments need not be increased . . . . In the final case . . . the lien avoidance action was filed by the trustee . . . . However, in this case, unlike [the other cases], the property recovered by the trustee—a motor vehicle—does not come within the property referred to in § 522(g)(2), which allows for exemption by the debtor even when a lien has been voluntarily granted. Motor vehicles are not included in the list of property on which the debtors could have avoided a nonpossessory, nonpurchase money security interest . . . . [A]ccordingly, the debtors . . . would not be entitled to the benefit of exemptions in their motor vehicle following the trustee’s avoidance of liens. . . . The debtors, moreover, may not claim the benefit of exemptions in this property under § 522(g)(1) if the lien constituted a voluntary transfer of the property. It is evident from the retail installment contract on this vehicle, which was signed by the debtors, that the subject lien was voluntarily granted . . . . For this reason, the debtors in a Chapter 7 case could not have invoked § 522(g)(1) to claim exemptions in the motor vehicle following the trustee’s recovery . . . . [T]hey are required, under the ‘best interests of creditors’ test, to pay into their plan for the benefit of unsecured creditors an amount of money equal to the value of the vehicle as of the effective date of the plan.”). See § 161.1 [ Exemption Issues ] § 90.2 Exemption Issues.
62 In re Dixon, 140 B.R. 945, 947 (Bankr. W.D.N.Y. 1992) (For purposes of the best-interests-of-creditors test under § 1325(a)(4), it is appropriate to deduct from the value of real property the trustee’s commissions and other costs of administration that would have to be paid in a Chapter 7 case. A 10% cost of sale figure is appropriate. Because this is an individual debtor’s Chapter 13 case, not involving the debtor’s spouse, in a Chapter 7 case the trustee would not be able to compel the nondebtor spouse to elect under 26 U.S.C. § 121 to exclude the proceeds of the house from capital gains taxes; therefore, it is appropriate to also deduct capital gains taxes that would be payable on liquidation of the debtor’s interest in the house for purposes of calculating § 1325(a)(4) in the debtor’s Chapter 13 case. “Congress adopted the words ‘the amount that would be paid on such claim if the estate were liquidated under Chapter 7.’ Congress could not possibly have rendered a clearer statement of its intent that the focus be upon a figure that is net of all normal administrative costs and expenses.”); In re Barth, 83 B.R. 204 (Bankr. D. Conn. 1988) (Absent other evidence, for purposes of calculating the best-interests-of-creditors test, the Chapter 7 trustee’s statutory compensation is appropriately deducted from estate assets.). Compare Brown & Co. Sec. Corp. v. Balbus (In re Balbus), 933 F.2d 246 (4th Cir. 1991) (Hypothetical cost of liquidating collateral is not deducted from value before calculating the portion of an undersecured claim that would be unsecured for eligibility purposes.); Cobb v. Mortgage Default Servs. (In re Cobb), 122 B.R. 22 (Bankr. E.D. Pa. 1990) (For purposes of determining market value of real estate at confirmation, when debtor intends to retain the property, foreclosure costs should not be deducted.).
63 In re Card, 114 B.R. 226 (Bankr. N.D. Cal. 1990). Accord In re Young, 153 B.R. 886 (Bankr. D. Neb. 1993) (For purposes of calculating a hypothetical Chapter 7 liquidation at confirmation of a Chapter 13 plan, it is appropriate to deduct capital gains taxes that would be payable upon sale of property of the bankruptcy estate.). See also In re Munster, 226 B.R. 632 (Bankr. E.D. Mo. 1998) (Plan fails best-interests-of-creditors test because in a Chapter 7 case trustee would utilize newly formulated exclusion in 26 U.S.C. § 121 and avoid paying capital gains taxes on the net sale proceeds of the debtors’ home.).
64 In re Gatton, 197 B.R. 331, 332–33 (Bankr. D. Colo. 1996) (Plan fails best-interests-of-creditors test because Chapter 7 trustee would abandon residence to avoid paying commissions and capital gains taxes and resulting estate would pay a larger dividend to unsecured claim holders. Debtors owned residence valued at $50,000 subject to an $18,300 lien. Colorado homestead exemption was $30,000, leaving $1,700 of nonexempt equity. Debtors also owned personal property valued at $14,923, subject to exemptions totaling $9,724, leaving $5,199. In Chapter 7, there would be $1,352 in administrative expenses and costs of sale and capital gains on sale of house exceeding $6,000. Using these figures, “unsecured creditors would receive nothing in a chapter 7 liquidation. Under the proposed Chapter 13 Plan, they would receive $1,795.” Chapter 13 trustee argued that “in the real world a chapter 7 Trustee would not liquidate the residence because it would cost more in real estate commissions alone (not even counting the trustee’s capital gain tax liability) than what is available.” “[W]e are not to just mechanically determine the amount of the nonexempt equity and use that as the ‘amount that would be paid.’ Rather we must reduce that amount by the anticipated chapter 7 administrative expenses and by the anticipated costs of sale. . . . [W]e must now take into consideration a hypothetical capital gains tax that would be payable by a chapter 7 trustee. . . . [I]t follows that we must go the next step and determine what a hypothetical chapter 7 trustee would do when faced with a property that would bring no net gain to the estate if it were liquidated. . . . In this case, just considering the normal real estate commission of 6%, the costs of sale of the Debtors’ residence would greatly exceed the equity available to chapter 7 creditors and that a rational chapter 7 trustee would abandon the residence to the Debtors. This means that the $1,700 that initially appeared to be present for distribution to chapter 7 creditors is no longer there and that it should not be included in the determination of the value of Debtors’ interest in nonexempt property. . . . When the residence is thus eliminated from the calculations, it appears that the Debtors have failed to meet the requirements of 11 U.S.C. § 1325(a)(4).”).
65 Jensen v. Dunivent (In re Dewey), 237 B.R. 783, 788 (B.A.P. 10th Cir. 1999) (Chapter 13 administrative expenses are not expenses of administration in the hypothetical Chapter 7 part of the § 1325(a)(4) calculation. In the context of an objection to a postpetition administrative expense claim by the debtor’s attorney, bankruptcy court did not err in disallowing claim for postpetition attorney fees based on determination that plan would not have been confirmable under § 1325(a)(4) had the large claim for attorney fees been known. “Section 1325(a)(4) requires two separate calculations. First, the court must consider the value, as of the effective date of the proposed Chapter 13 plan, of the property to be distributed to each unsecured creditor in Chapter 13, taking into account the Chapter 13 administrative expenses. Next, the court must consider the amount that would be paid on each allowed unsecured claim if the debtor’s estate were liquidated in a hypothetical Chapter 7 case, taking into account the Chapter 7 administrative expenses. . . . The Chapter 13 plan will meet the best interests of creditors test if the distribution amount determined in the first, Chapter 13, calculation is not less than the amount in the second, Chapter 7, calculation. The court does not, as suggested by [the debtor’s attorney], combine Chapter 13 and Chapter 7 expenses in calculating the amount to be distributed in Chapter 7 under the best interests of creditors test.” The hypothetical liquidation analysis at confirmation showed that unsecured, nonpriority creditors would be paid 6% of their claims in a Chapter 7 case. The debtor’s proposed plan would pay 8% based on no additional payment to the debtor’s attorney. The confirmed plan provided that additional attorney fees would be paid postpetition as an administrative expense claim. Almost simultaneously with confirmation, the debtor’s attorney filed a request for postpetition fees of approximately $4,000. If the attorney fees were allowed, the confirmed plan would pay almost nothing to unsecured claim holders.).
66 502 U.S. 410, 112 S. Ct. 773, 116 L. Ed. 2d 903 (1992).
67 In re Ward, 129 B.R. 664 (Bankr. W.D. Okla. 1991).
68 502 U.S. at 410.
69 502 U.S. at 417.
70 See discussion of schedules beginning at § 36.7 Schedules—In General.
71 See §§ 13.1 [ Use of Statements and Schedules in Eligibility Calculations ] § 14.3 Use of Statements and Schedules in Eligibility Calculations and 14.1 [ Are Claims Split under 11 U.S.C. § 506(a)? ] § 14.4 Are Claims Split under 11 U.S.C. § 506(a)? for discussion of the analogous problem of how the amount of debt will be determined for eligibility purposes.