Chapter 13 bankruptcy offers debtors the chance to get their financial affairs in order while they repay some or all of their debts over a three or five year period. However, due to the requirements of Chapter 13, not everyone is eligible for this type of plan. Here are the requirements that you must meet in order to qualify for Chapter 13 Bankruptcy.
Sufficient Disposable Income
One of the most important prerequisites to qualify for Chapter 13 bankruptcy is that you earn sufficient disposable income. This is why Chapter 13 is sometimes known as a “wage earner’s plan.”
Under the bankruptcy code, disposable income is any money that remains after you subtract certain allowed expenses from your income. These exemptions include:
- Food and clothing
- Housing costs, including utilities
- Transportation costs
- Childcare expenses
- Health care costs, including health insurance fees
Some of these monthly costs, such as your car loan and mortgage, will be included with your monthly payment and paid to the bankruptcy trustee as part of your repayment plan.
After calculating your necessary expenses, all other income is considered disposable income and will go towards paying your debts in order of priority.
Income that goes towards your monthly payments can come from a variety of sources, including:
- Your regular salary
- Income from any side-hustles you have or other seasonal work
- Retirement income, including pensions or Social Security
- Rent collected or other income from property you own, and
- Unemployment income
If your regular income is not steady enough to support monthly payments, you may not be able to qualify for Chapter 13. Remember, this plan requires you to make regular monthly payments over a several year period.
For example, in the course of a year, Carol spends several months working various temporary jobs to support herself, and collects unemployment when she is between jobs. Carol may or may not be eligible for Chapter 13, due to the uncertainty of her employment situation from month-to-month. Her friend, Dave, works a steady nine to five job in a stable office. Due to the foreseeable regularity of Dave’s income, he may be able to qualify to file under Chapter 13.
If you do not have sufficient regular income to support a Chapter 13 plan, filing for Chapter 7 bankruptcy may be another option to consider.
Limitations on the Amount of Debt You Owe
In order to qualify for Chapter 13, your secured and unsecured debt must be below certain thresholds.
Secured debt includes loans that are secured by property, such as:
- A mortgage or home equity loan
- Your car loan
- A secured credit card
To be eligible for Chapter 13, the total amount of secured debt you can have is currently $1,184,200.
Unsecured debt is for loans that are not secured by property. This type of debt includes:
- Unsecured credit cards
- Medical debt
- Student loans
- Payday or other personal loans
If the total amount of your unsecured debt is less than $394,725, you can qualify for Chapter 13.
For example, Bob may owe $300,000 for his mortgage, $20,000 on a new car, $40,000 in credit card debt, and another $25,000 in medical bills. His secured loans total $320,000, while his unsecured loans total $65,000. Under the current debt allowances, Bob may be eligible for a Chapter 13 plan, as long as he meets the other requirements.
If your debt is too high to meet this threshold, you may be eligible for Chapter 11 bankruptcy.
Additionally, you can be ineligible for Chapter 13 if, within the previous 180 days, you had a bankruptcy petition dismissed due to your willing failure to appear before the bankruptcy court, or willing failure to comply with an order of the court.
Within this 180 day window, you must also complete a credit counseling course. There are a number of US Trustee Office approved courses in Georgia, but I recommend my clients work with www.hummingbird.org because the course can be completed online. When the time comes, completing the course online will make it significantly easier to complete this required step at your convenience.
If you have successfully completed a Chapter 13 plan, or had debts discharged in a Chapter 7 case recently, there may be additional time limitations you need to take into consideration before you can file again.
The Bankruptcy Petition
When you file for Chapter 13 bankruptcy, you need to submit a number of forms to the court. These include:
- The bankruptcy petition itself;
- Schedules of assets and liabilities, including property you own;
- A schedule of your current income and expenditures, such as clothing, food, shelter, transportation, and medicine;
- The debt repayment plan developed in your credit counseling course;
- Evidence of income for 60 days before filing; and
- A statement of monthly net income.
When you submit these documents, a Chapter 13 trustee will review your proposed payment plan and either approve it or require modifications. The bankruptcy code requires that you pay all priority debts, such as taxes and court-ordered payments, in full. If you wish to keep property that secured a loan, such as your house or car, you will also need to pay a significant amount of these outstanding debts.
You should note that your creditors, especially your nonpriority unsecured creditors, may object to your plan. Typically, these types of creditors make objections on the grounds they are not receiving enough of the monthly payment to cover your debt, unless your plan ensures all creditors are paid in full.
After the court approves your plan, you will begin making your monthly payments. As your income changes, your monthly payments may change as well. At the end of your three or five year plan, you will receive your Chapter 13 discharge, and you can begin rebuilding your credit.
Related article: How Long Does It Take to File Chapter 13
To be eligible for Chapter 13, you must be up to date in submitting your federal and state income tax filings for the past four years. Moreover, during your repayment plan, you must submit your tax filings each year to the bankruptcy court. Failure to submit these documents could result in the dismissal of your case. The bankruptcy court may also dismiss your case if you do not up to date on current court-ordered payments, such as child or spousal support.
This article is for informational purposes only and does not contain legal advice. If you have questions regarding your eligibility for Chapter 13, contact our experienced bankruptcy attorney today to understand your options.