Qualifying for Chapter 13 Bankruptcy: A Brief Overview

The two most common types of bankruptcy filings are Chapter 7 and Chapter 13. Qualifying for Chapter 13 bankruptcy requires certain factors apply before the individual can file.

First and foremost, business—even sole proprietorships—cannot file for Chapter 13 in the business’ name. However, if an individual who does own a business wants to file for Chapter 13 as an individual—and who is not a stock or commodity broker—then this is permissible.

Disposable Income

To qualify for Chapter 13, the filer must demonstrate adequate disposable income. Disposable income is the amount of remaining income after paying necessary bills. Since Chapter 13 involves debt reorganization, and not complete discharge of all debt that is the hallmark of Chapter 7, the filer must have enough funds to comply with the repayment plan. Acceptable income can come from:

  • Regular salary/wages
  • Self-employment income
  • Seasonal work income
  • Commissions
  • Pension payments
  • Disability, Social Security, unemployment and/or worker’s compensation benefits
  • Child support and/or alimony
  • Royalties and rents
  • Proceeds from selling property

Additionally, a non-working spouse may file for Chapter 13 using income from his/her working spouse, and an unemployed spouse can also file jointly with his/her employed spouse.

Amount of Debt

Another qualifying factor involves the debt amount. If secured debts exceed $1,184,200.00 and/or if unsecured debts are greater than $394,725.00, then the filer is not eligible to file Chapter 13. The difference between the two types of debt is that secured debts rely on property that is subject to repossession if an individual defaults on the loan, while unsecured debts are commonly medical bills, utility bills, and credit card debts. Further, these figures are periodically adjusted for inflation.

Income Tax Filings Must be Current

Chapter 13 filers must prove that s/he filed all federal and state income tax returns for the four tax years preceding the bankruptcy filing date.

Previous Bankruptcies

A debtor may not file Chapter 13 if s/he had discharged any debt in a prior Chapter 13 case within the past two years, or in a Chapter 7 case within the past four years.

Credit Counseling

Filers must file with the court a certificate proving that they attended an approved credit counseling agency debt counseling course at least 180 days before filing. Additionally, if the credit counseling agency created a debt management plan then the filer must provide this to the court as well. These documents must be filed with the initial bankruptcy petition or no later than 15 days following filing.

The Proposed Plan

To be approved by the court, a proposed payment plan must include all priority debts and reaffirmed secured debts. Non-priority and unsecured creditors may also be repaid depending on whether the filer wishes to keep the property.

For more information or to see if Chapter 13 is right for you, please contact us.