Ara Betty is a freelance financial writer and speaker about personal financing. She helps people realize their goals on becoming debt free with the use of debt consolidation. She hopes to expand her knowledge more about loans and debt to be able to write a book.
Filing bankruptcy should be considered only as a last resort by a person with financial troubles. For many debtors, Chapter 13 bankruptcy is a good option. However, not everyone is eligible for it. Let’s look at what Chapter 13 is, how to file bankruptcy and the requirements for Chapter 13 bankruptcy eligibility.
What is Chapter 13 bankruptcy
Chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period. If the debtor’s current monthly income is greater than the applicable state median, the plan must generally be for five years. In no case may a plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.
Chapter 13 bankruptcy eligibility
In order to file for Chapter 13 bankruptcy, every debtor must meet the requirements under this Chapter. With Chapter 13, unlike Chapter 7 bankruptcy which allows the debtor to discharge some debts in exchange for the sale of a non-exempt property to pay creditors, Chapter 13 allows the debtor to keep their property and repay creditors in a three or five year court-approved repayment plan.
According to Chapter 13 bankruptcy eligibility requirements under the bankruptcy code, a debtor must meet the following criteria to qualify:
You are not a business entity
A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help re-organizing their debts.
Only individuals and those filing jointly as husband and wife can file for Chapter 13 bankruptcy. A business owner may not file in the name of the business, if, however, ownership is as a sole proprietor or with a partner, the debtor can file in their name for the debts they are personally liable for. However, stockbrokers and commodity brokers are not eligible for Chapter 13.
You are not barred by a prior bankruptcy
If a debtor had discharged any debt in a Chapter 13 bankruptcy within the last two years or in a Chapter 7 bankruptcy within the last four years, he is not eligible for a Chapter 13 discharge until the required time has elapsed.
A previous bankruptcy case wasn’t dismissed within the previous 180 days
A debtor cannot file for Chapter 13 or Chapter 7 if a prior bankruptcy petition was dismissed during the preceding 180 days for either of the following reasons:
1. The debtor wilfully violated a court order or failed to appear before the court; or
2. The debtor requested that the court dismisses the case after a creditor asked the court to lift an automatic stay.
You have fulfilled the credit counseling requirement
A Chapter 13 debtor must file with the bankruptcy court a certificate of proof establishing that an approved credit counseling agency provided debt counseling in at least 180 days prior to filing for Chapter 13. If the credit counseling agency created a debt management plan, it must provide a copy of it to the court. The debtor must file the certificate with the initial paperwork or must provide it within 15 days after filing for bankruptcy.
Your debts aren’t too high
Chapter 13 requirements impose a limit on the amount of a filer’s debt. Chapter 13 is available to debtors with less than $336,900 in unsecured debt (these are debts, not secured by property, such as credit card debt and medical bills) and less than $1,010,650 in secured debt (in which a creditor can take the property securing the debt if it’s not paid). Debt limits are adjusted for inflation every three years.
You have filed your income tax returns
To meet Chapter 13 requirements, a debtor must provide proof of filing state and federal income tax returns for the previous four years. The debtor must provide the trustee with a copy or a transcript of the most recent federal tax return filed with the IRS at least seven days before the first meeting of creditors.
The plan you proposed repays all required debts
Under Chapter 13, bankruptcy law requires the repayment of some debts in full. Debts in this category include:
Unsecured debts, such as child support, alimony or support payments and non-dischargeable taxes.
Secured debts that survive the repayment plan
Secured debts such as a mortgage or a vehicle loan must remain current during the repayment plan.
Other secured debts
Secured debts like judicial and tax liens must be paid in full during the repayment time.
You can repay a certain amount to unsecured creditors
Non-priority, unsecured creditors may also be entitled to repayment. Because a debtor may keep non-exempt property under Chapter 13 bankruptcy, a debtor must repay non-priority, unsecured creditors at least the amount equal in value to their non-exempt property over the life of the repayment plan. Non-exempt property usually includes household appliances and furniture, inexpensive jewelry and a certain amount of equity in a home or a motor vehicle.
You have sufficient income to repay debt
After deducting allowable expenses, a debtor must have enough income for all debt obligations. A debtor may include income from a working spouse even if the spouse has not filed jointly for bankruptcy, self-employment income, wages and salary, Social Security benefits and unemployment benefits. To qualify for Chapter 13, the debtor must have enough income for expenses for mandatory payments to priority and unsecured creditors, and for payments to unsecured creditors in an amount at least equal in value to the debtor’s non-exempt property. Based on a percentage of all payments made in the plan, the debtor must pay the trustee a commission.