Section 1325 governs Chapter 13 plan confirmation. The court "shall confirm" a plan that meets enumerated requirements. This page covers the requirements and the cramdown standard for plans where unsecured creditors object.
The (a) requirements (§ 1325(a))
The court shall confirm a plan if:
The plan complies with provisions of the chapter and other applicable provisions of the Code
Any required filing fee has been paid
The plan has been proposed in good faith
The plan provides for at least as much recovery to unsecured creditors as they'd receive in a Chapter 7 liquidation (the "best interest" test under § 1325(a)(4))
With respect to each allowed secured claim provided for by the plan, certain conditions are met
The debtor will be able to make all payments under the plan
The action of the debtor in filing the petition was in good faith
The debtor has paid all amounts that are required to be paid under any domestic-support obligation arising after the date of the filing of the petition
The debtor has filed all federal, state, and local tax returns required to be filed
The (b) cramdown test
If the plan does not pay unsecured creditors 100% and one objects, § 1325(b) requires:
The plan to provide that all of the debtor's "projected disposable income" for the applicable plan period will be applied to make payments to unsecured creditors, OR
The plan to pay unsecured creditors in full
The "projected disposable income" calculation
For above-median debtors, projected disposable income is calculated using a formula similar to the means test:
Start with current monthly income (CMI) calculation from petition
The remainder is projected disposable income for plan-payment purposes
For below-median debtors, projected disposable income is calculated as actual income minus actual reasonable expenses (Schedule J).
The "best interest of creditors" test
Section 1325(a)(4) requires the plan to pay unsecured creditors at least as much as they'd receive in Chapter 7 liquidation. This requires:
Hypothetical liquidation analysis: what would non-exempt assets bring at trustee sale?
Subtract administrative expenses of a hypothetical Chapter 7 case
The remaining "Chapter 7 distribution" sets the floor for Chapter 13 unsecured payments
For most no-asset Chapter 13 cases, this floor is $0 (Chapter 7 would have produced no unsecured distribution). Above that floor, plans must pay enough to satisfy the test.
Good faith
Section 1325(a)(3) requires the plan to be proposed in good faith. The "good faith" inquiry is multi-factor and discretionary; relevant factors include:
Whether the plan accurately reflects the debtor's financial situation
Whether the percentage of unsecured-debt repayment is reasonable given the debtor's income
Whether the plan abuses or attempts to manipulate Chapter 13's structure
The debtor's pre-petition conduct and reason for filing