Federal law provides the regulations for five types of bankruptcy cases, the most common chapters being chapters 7, 11, 12 and 13. With each of the several types of bankruptcy cases comes its own set of procedures and rules. In order to qualify for bankruptcy under Chapter 13, the debtor must meet certain requirements.
The debtor must meet the following requirements to qualify for Chapter 13 bankruptcy pursuant to the Bankruptcy Code:
Debtor isn’t a business entity
Neither corporations nor LLCs (limited liability companies) are eligible for Chapter 13 bankruptcy. The debtor must be an individual or a husband and wife seeking to file jointly.
No bankruptcy discharge within the past two years
If the debtor has discharged their debts through a prior Chapter 13 case within the past 2 years, he/she is not eligible to file another chapter 13 case until the requisite time period passes.
Debtor has fulfilled the credit counseling requirement
The debtor is required to complete a credit counseling course within the 180 days prior to the filing of the case and file a certificate proving completion with the bankruptcy court.
Debts do not exceed the debt limit
There is a limit on the amount of debt a Chapter 13 debtor may have. Unsecured debts, such as credit cards, personal loans and medical bills, must be less than $336,900, and secured debts, such as mortgage and car loans, must not exceed $1,010,650.
The Debtor proposes a feasible repayment plan
In order to succeed in a Chapter 13 case, the debtor must repay certain debts, or a portion thereof. Some of those debts may be priority debts, such as tax debts, and secured debts (such as a mortgage) that continue even after the proposed repayment plan.
Unsecured debts such as credit card debt
In some cases, the debtor must also repay some or all non-priority and unsecured debts, such as credit cards and medical bills. The amount to be repaid will depend on the debtor’s entire financial situation, including income, expenses, debts and assets.
The debtor has sufficient disposable income
In order to succeed in a Chapter 13 case, the Debtor must have enough income to cover basic expenses as well as a monthly payment toward debt obligations and a percentage to the bankruptcy Trustee. Even if the debtor’s spouse has not filed jointly for bankruptcy, the debtor may still include their income as part of the household budget for purposes of their income calculations.
Advantages to Filing under Chapter 13
There are a number of advantages to filing a Chapter 13. One primary advantage is the time the debtor is granted to make their debt payments. Depending on the repayment plan your attorney proposes, the Trustee may be flexible as to the terms of your payment. Also, after successfully completing the repayment plan, individual creditors cannot require you to pay their debts in full.
Another key advantage of a successful Chapter 13 case covers real property. The debtor is allowed to reorganize their debts, including arrears on mortgage payments, under their Chapter 13 plan, thereby keeping their property out of foreclosure. However, a repayment plan must be carefully crafted and proposed based on a number of factors in order to succeed.
Depending on the type of the debts at issue, a Chapter 13 case can provide different solutions.
What about disadvantages?
Naturally, there are disadvantages as well. A Chapter 13 case will require you to commit to making plan payments for up to five years. Moreover, the debts must be repaid out of your disposable income, causing all of your extra cash to be tied up during the entire period of the repayment plan. A change in financial circumstances can also devastate your plan mid-way through, though the Court will allow you to propose modifications if and when appropriate.
Role of the Chapter 13 Trustee
Upon the filing of a Chapter 13 case, a Trustee is appointed to administer the case. The duties of the Trustee include appearing at the debtor’s 341(a) meeting of creditors and confirmation hearing, ensuring that the debtor is making timely plan payments, and administration of the debtor’s case including distribution of funds to creditors and disposition of any assets in the case.
While this article covers some basics, Chapter 13 cases are complicated and require careful attention and experience. Don’t hesitate to contact our experienced attorneys for a free consultation regarding your financial situation.