Making Sense of Bankruptcy: Qualifying for Chapter 13
Chapter 13 “adjustment of debts” gives you extraordinary advantages over creditors, especially over certain kinds of creditors.
Here’s the sentence we’re exploring today:
You can file a Chapter 13 case if 1) you are “an individual,” 2) you have “regular income,” and 3) the amount of your debts does not exceed the legal limits.
Filing a Chapter 13 case gives you extraordinary power over particular kinds of creditors. Here’s a sampling of what it can do:
- You may qualify for a vehicle loan cramdown, enabling you to significantly lower your monthly vehicle loan payments, avoid having to catch up on any late payments, and greatly reduce how much you pay before the vehicle is yours free and clear.
- You can catch up on back child and spousal support as your budget allows, without your ex-spouse or support enforcement being allowed to garnish wages and accounts or to suspend your driver’s or occupational licenses.
- Older income tax debts may be paid pennies on the dollar and the rest written off forever.
- Newer income tax debts can be paid off over time—over as long as 5 years—without any accruing interest and penalties throughout that time, and without the IRS/state being able to chase you on those debts.
- You may be able to “strip” your second (or third) mortgage from your home’s title, so you never have to make those monthly payments again, greatly reducing the debt against your home, making keeping the home more sensible for the both for the short term and long.
- You may write off non-support debts owed to an ex-spouse after paying little or nothing on those debts.
Chapter 13 is for “Individuals” Only
Only “individuals”—human beings—can file a Chapter 13 case, according to the U.S. Bankruptcy Code.
An individual and “such individual’s spouse” may file a joint Chapter 13 case.
Unlike Chapter 7 “liquation” or Chapter 11 “reorganization,” a business entity—a corporation, limited liability company (LLC), or business partnership—cannot file a Chapter 13 case in its own name.
If you are an owner or partial owner of a business that IS in one of these legal forms, you may file a personal Chapter 13 case to deal with the debts—personal and business—on which you are personally liable. But the business itself cannot file under Chapter 13. It either doesn’t file any bankruptcy case (for example, if it has no assets at all, or if it can continue operating without bankruptcy help), files a Chapter 7 case to liquidate its assets, or files a Chapter 11 case to reorganize under court protection.
If you are an owner or partial owner of a business that IS NOT in one of these legal forms but instead is a “sole proprietorship,” you and your business can file bankruptcy in your name, including under Chapter 13. That’s because there’s no legal separation between your personal and business assets and debts.
You Must Have “Regular Income”
You can’t just be any individual but must be an “individual with regular income.” That phrase is defined in the Bankruptcy Code as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”
That definition is not very helpful. How “stable and regular” does your income need to be before it is “sufficiently stable and regular”? How does a bankruptcy judge make that determination at the beginning of a Chapter 13 case, especially if it’s an income source that has had some irregularities in the past (such as from self-employment)?
The ambiguousness of this definition gives bankruptcy judges lots of flexibility about how they apply this qualification. Most give you the benefit of the doubt at the beginning of the case, giving you the opportunity to make the monthly Chapter 13 plan payments to see if you can establish that your income is “stable and regular” enough. On the other hand, if your income has truly been very inconsistent, you and your attorney may have to fight hard to persuade the judge that your income is steady enough to qualify.
If you file a Chapter 7 case there is no legal limit on how much debt you can have. But under Chapter 13 there are maximums, separate ones for total secured and total unsecured debts.
Chapter 13 debt limits were imposed back in the late 1970s when the modern Chapter 13 procedure was created. Congress wanted to restrict this relatively streamlined procedure to relatively simple situations. For people with very large debts, the more elaborate Chapter 11 “reorganization” was considered more appropriate.
Originally the debt limits were $350,000 of secured debts and $100,000 of unsecured debts. In the mid-1990s these limits were raised to $750,000 and $250,000 respectively, with automatic inflation adjustments to be made every 3 years thereafter. The most recent of these adjustments applied to cases filed starting April 1, 2013 and through March 31, 2016, with a secured debt limit of $1,149,525 and unsecured debt limit of $383,175. These limits apply whether the Chapter 13 case is filed by an individual or by an individual and “such individual’s spouse”—they are NOT doubled for a joint case.
Reaching EITHER of the two limits disqualifies you from Chapter 13.
These limits may sound high, and indeed are not a problem for most people who want to file a Chapter 13 case. But be careful because certain kinds of debts can skyrocket and exceed these maximums. For example, a vehicle accident involving serious personal injuries, especially if more than one person was injured, can result in hundreds of thousand dollars of debt shockingly fast. Also, individual liability on business debts can accrue quickly.