What is the Best Interests of Creditors Rule?
The best interests of creditors rule significantly expands the bankruptcy exemptions in Illinois. These property exemptions are already among the most debtor-friendly ones in the nation, thanks to some recent legal changes.
This rule applies in all kinds of consumer bankruptcies, but primarily in Chapter 7s. These informal exemptions, along with the formal, written exemptions, help ensure that distressed debtors get the fresh start the Bankruptcy Code guarantees.
Only a Chicago bankruptcy lawyer knows about obscure legal loopholes, like the best interests of creditors rule, which expands Section 1129(a)(7) and Section 1325(a)(4) of the Bankruptcy Code. More importantly, a lawyer knows how to make these loopholes work for people.
Breaking Down the Best Interests of Creditors Rule
Under the best interests of creditors rule (a/k/a the liquidation test), each creditor must benefit financially if the trustee (person who oversees the case for a judge) liquidates nonexempt property.
A different version of this rule applies in some other cases, mostly a Chapter 13 debt consolidation plan. Each creditor must receive a minimum amount equal to what they would have obtained if the debtor’s assets were sold off in a Chapter 7 liquidation. In simple terms, a repayment plan cannot leave creditors worse off than they would be in a straight liquidation scenario.
How It Works in an Illinois Chapter 7 Bankruptcy Case
The best way to explain the best interests of creditors rule in a Chapter 7 is to use the example of a motor vehicle.
Assume Tina has a second motor vehicle that the formal exemptions do not cover. She financed the car for $50,000 at the time of purchase. Although she remains current on car payments, two years later, she files bankruptcy.
New cars lose about 30 percent of their value in the first two years. So, the car she bought for $50k has a current fair market value of approximately $35k. So, that’s probably the most the trustee would get for the vehicle at an auction sale.
Additionally, the trustee must pay all sale-related expenses, such as seizing the vehicle, storing it, and making any necessary repairs. On top of that, the trustee must also pay the auction fee. That $35,000 becomes more like $30,000.
The bank financed the vehicle for $50k. So, the bank loses money if the trustee repossesses Tina’s car. In contrast, if Tina keeps the car and keeps making payments as she’s done, the bank eventually gets all its money back, plus a tidy profit.
Since the seizure would not benefit the creditor, it is illegal under Illinois law, and a Chicago bankruptcy lawyer can stop that seizure.
The Liquidation Rule in a Chapter 13
In Illinois bankruptcy courts, judges carefully evaluate proposed repayment plans to ensure compliance with this rule. The court compares two key figures:
- Liquidation Value, or the amount creditors would receive if the debtor’s non-exempt assets were sold under Chapter 7, and
- Plan Distribution, which is the amount creditors are set to receive under the proposed repayment plan.
If the plan does not meet or exceed the liquidation value, the court won’t approve it. So, they must ensure unsecured creditors receive at least as much as they would if assets were liquidated.
For example, if Thomas owns non-exempt property worth $10,000, unsecured creditors must receive at least $10,000 through the repayment plan. If the plan proposes less, the court will reject it.
Understanding this rule is essential for anyone navigating bankruptcy in Illinois. Whether you are an individual, a trustee, or a Chicago bankruptcy lawyer, this rule directly impacts property exemptions in a Chapter 7 and a Chapter 13 repayment plan and its likelihood of approval.
Connect With a Detail-Oriented Cook County Lawyer
No matter what kind of financial problem you are having, there’s a way out. For a free consultation with an experienced debt reduction attorney in Chicago, contact the Bentz Holguin Law Firm, LLC. Convenient payment plans are available.
Source:
kbb.com/car-depreciation/
