This section is designed to provide guidance regarding eligibility to file a chapter 13 bankruptcy case. Please note that people who do not qualify to file a bankruptcy case under chapter 13 of the bankruptcy code may still be able to file bankruptcy under chapters 7, 11, or 12, of the code.
The most important consideration when a client decides she would like to file a chapter 13 bankruptcy case is whether or not she has the income or assets to propose a confirmable chapter 13 plan. The essence of chapter 13 bankruptcy is a commitment to pay your creditors back over a long period of time, usually 3 to 5 years, and your proposal to repay the creditors is called the “plan.” Similarly, a “confirmable plan” is basically a plan where the debtor has enough income or assets to pay all types of creditors which the bankruptcy code says must be paid in full, and some portion, although not always, of creditors who need not be paid in full. Creditors who must be paid in full in a chapter 13 case include: child support not owed state agencies; chapter 13 trustee fees; most tax debts; and secured debts that will outlive your plan (like most mortgages). The vast majority of chapter 13 bankruptcy cases are proposed with the idea of obtaining confirmation of a bankruptcy plan. However, as long as a case is proposed in “good faith” toward creditors, it is possible to file a chapter 13 bankruptcy case in which plan confirmation is not the ultimate goal. As an example, some clients of Nova Law Group may need a temporary reprieve of a few weeks to a few months to execute a transaction, like the sale of a home or other valuable property, and need the protection of the automatic stay to prevent a foreclosure. This is an acceptable use of chapter 13 bankruptcy, as long as the case has been filed in good faith and with a sale or other transaction in mind that will result in creditors receiving payment, even if payment is deferred or delayed. As the automatic stay prevents nearly all types of enforcement actions, including foreclosure actions from proceeding against the client, chapter 13 bankruptcy can be a very effective means of obtaining a reprieve from creditors while a plan is formulated for retaining or selling the home, whichever is in the best interests of the client.
While the exact calculation for proposing a chapter 13 plan is extremely complicated and beyond the scope of this article, the simple way of calculating whether or not you can propose a confirmable plan is to do the following: add up all income earned or received from all sources; add up all of your expenses on everything that you intend to keep after filing bankruptcy, including cars, homes, food, utilities, etc.; add up all payments that you would have to make to creditors that “must be paid in full” (described above) and divide by 36 or 60 (3 or 5 year plan); add 10% to your expenses for the chapter 13 trustee’s fee; and now compare your income to the sum of all the expenses listed above. If you’re income is still higher than the sum of all of the above expenses, then you can possibly propose an eligible chapter 13 plan. However, the list above is by no means an accurate representation of every step in determining your eligibility for chapter 13, and you should definitely seek the counsel of an attorney if you want to consider filing a chapter 13 case. The list is only designed as a rough estimate to determine your eligibility, and the actual computation is much more complex. If it seems like you may be able to propose a confirmable plan, then you can move on to the final steps for determining eligibility to file chapter 13 bankruptcy. Additionally, clients with substantial assets may be able to utilize assets (generally cash, stock, bonds, or other liquid assets) to make payments required by the chapter 13 plan, if income is insufficient to make such payments. Accordingly, it is possible to obtain confirmation of a plan where income does not exceed expenses, if there are other sources of money (such as assets) to make the payments required by the chapter 13 plan.
To file a chapter 13 bankruptcy, you must have secured debt less than $1,395,875 and unsecured debt less than $465,275, or your case may be subject to dismissal or conversion at the discretion of the bankruptcy court. These numbers change regularly however, so consult with an attorney to ensure that accurate numbers are used. A “secured debt” is basically a debt whereby the creditor can seize the property itself if you don’t pay. A secured debt always has a “lien” which attaches the debt to property. Examples of secured debts are automobile loans, home loans, construction liens, UCC liens, and many others. In contrast, an “unsecured debt” is a debt where the creditor can sue you if you don’t pay, but can’t take away any of your property directly. Examples of unsecured debts are your personal debt to Aunt Mary Jane, your unpaid dentist bill, parking tickets, credit card debts, medical bills, and so on.
To propose a confirmable chapter 13 plan, you must also pay your creditors at least what they would have received if you had filed for chapter 7 bankruptcy. One of the advantages of a chapter 13 bankruptcy is that you generally get to keep even valuable property with substantial equity, if you can afford to make the payments. This provision ensures that creditors aren’t in a worse position because you filed for chapter 13 bankruptcy than they would be in chapter 7 bankruptcy, had you filed in that chapter.
If it seems like you meet all or most of the requirements posted in this section and are interested in filing a chapter 13 bankruptcy case, then we recommend you consult with an attorney regarding the possibility of filing chapter 13 bankruptcy. Nova Law Group is pleased to provide you with a free consultation to consider your chapter 13 bankruptcy options.
