You can file a Chapter 13 case if you are an “individual,” have “regular income,” and don’t owe too much.
If you qualify, a Chapter 13 case is an extraordinarily powerful tool for dealing with certain kinds of debts. For example:
- vehicle loan cramdown may allow you to significantly lower your monthly vehicle loan payments, not have to catch up on any late payments, and reduce how much you pay overall for your vehicle
- catch up on child and spousal support arrearage based on what you can afford, stopping support enforcement against your wages and accounts and against your driver’s or occupational licenses
- pay newer income tax debts over time—as long as 5 years—usually without any accruing interest and penalties
- strip your second mortgage from your home’s title in some situations, permanently ending those monthly payments, reducing the debt against your home
- write off non-support debts owed to an ex-spouse after paying little or nothing on those debts
Must be an “Individual”
Only “individuals”—human beings—can file a Chapter 13 case. See Section 109(e) of the U.S. Bankruptcy Code.
You as an individual, and “such individual’s spouse,” may file a joint Chapter 13 case together.
A business—a corporation, limited liability company (LLC), or business partnership—cannot file under Chapter 13 in its own name. This is unlike a Chapter 7 “liquation” or Chapter 11 “reorganization,” which businesses can file in their own name.
If you own such a business, you can file a personal Chapter 13 case. It would deal with the debts—personal and business—for which you are personally liable. But the business itself cannot file under Chapter 13.
If you own a business that’s a “sole proprietorship,” you can file bankruptcy in your name, including under Chapter 13. That’s because your personal and business assets and debts are all legally in your name. The business is not its own legal entity.
Have “Regular Income”
To qualify under Chapter 13 you must be an “individual with regular income.” That phrase is defined as one “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.” Section 109(e) of the Bankruptcy Code.
This definition is quite ambiguous. So bankruptcy judges have lots of flexibility about how they apply this requirement. Usually they give you the opportunity to make the monthly Chapter 13 plan payments to see if you can establish that your income is indeed “stable and regular” enough. But if your income has truly been inconsistent, you and your bankruptcy lawyer may have to persuade the judge that your income is steady enough to qualify.
Secured and Unsecured Debt Limits
If you file a Chapter 13 case there are legal limits on how much debt you can have. There are separate maximums for your combined secured debts and your combined unsecured debts. This is unlike Chapter 7 for which there are no debt maximums.
Why does Chapter 13 have debt limits when Chapter 7 doesn’t? These debt limits were established in the late 1970s when the modern Chapter 13 procedure was created. Congress wanted to restrict this comparatively streamlined procedure to relatively simple situations. For people with very large debts, the more complicated Chapter 11 “reorganization” is supposed to be more appropriate.
The debt limits were originally $350,000 for secured debts and $100,000 of unsecured debts, but have been raised significantly. They are now adjusted every 3 years automatically with inflation. The most recent adjustments apply to cases filed from April 1, 2016 through March 31, 2019. The secured debt limit is $1,184,200 and the unsecured debt limit is $394,725.
- Reaching EITHER of the two limits disqualifies you from Chapter 13.
- These limits apply whether the Chapter 13 case is filed individually or with “such individual’s spouse.” They are NOT doubled for a joint case.