Understanding the Chapter 7 Bankruptcy Liquidation Test

What is the liquidation test? When you graduated, whether from high school, college, or received a post-graduate degree, you probably thought you were done with tests. But now that you are researching filing for Chapter 13 bankruptcy, you find out there’s one more test to pass: the Chapter 7 Liquidation test.

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Key Points:

• With Chapter 13 bankruptcy, you must pass a “Liquidation Test” (aka “Best Interests Test”).
• The liquidation test is based on a hypothetical Chapter 7 liquidation. It assesses the value of your non-exempt assets (not protected by bankruptcy exemptions) and determines how much creditors would receive if those assets were sold.
• Exemptions are key. Bankruptcy exemptions protect certain assets from being seized in bankruptcy. However, to which your assets are protected varies per state. The liquidation test focuses on the non-exempt portion of your assets.
• In Chapter 13, unsecured creditors must pay at least as much as they would if the hypothetical Chapter 7 were filed.

What is the Liquidation Test? Start with Chapter 7 Bankruptcy

Even though you are filing for Chapter 13 bankruptcy, pretend you filed Chapter 7. Part of the process requires analyzing the value of your assets and your state’s bankruptcy exemptions. This would determine whether your assets are protected.

• What is the Chapter 7 Bankruptcy Means Test? Here’s What You Need to Know

For example, suppose after adding up all the values of your personal property and applying the bankruptcy exemptions, you are $6,000 over exempt. That’s the amount the trustee is entitled to. Those funds are used to settle the bankruptcy estate and pay creditors according to their pro rata share.

In a Chapter 7 bankruptcy, the trustee will provide a short period to pay back the non-exempt portion of your bankruptcy estate. Typically, ten to twelve months.

The other option would be to surrender those assets to the bankruptcy trustee, who would sell them at an auction and use the proceeds to distribute to your creditors.

Chapter 13 Bankruptcy

With Chapter 13, exemptions are also an issue. However, other requirements must be met since Chapter 13 is more complicated than Chapter 7 bankruptcy. For example, the bankruptcy has to include not only disposable income but also the value of non-exempt assets. Hence, the liquidation test is sometimes called the “best interests test.”

If Chapter 13 is filed, creditors must receive at least as much as they would if the debtor’s assets were liquidated under Chapter 7 bankruptcy. Returning to my initial hypothetical, at least $6,000 is paid into the plan for unsecured creditors.

If the best interests test is not met, the trustee will object to the plan, and the bankruptcy judge will deny confirmation of your case.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. For paralegals and students buying single copies, you can do so via Amazon Books. To access my YouTube channel, click this link.

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated on September 9, 2025.