Not everyone can use Chapter 13. In fact, Bankruptcy Law itself shows the debtor if they can use the Bankruptcy system at all to get that fresh start.
Bankruptcy law has within it certain rules and guidelines that point the debtor in certain directions. Indeed, Bankruptcy has criteria that force the debtor into making certain decisions. Thus, before the debtor can decide whether to file for Chapter 13, the debtor needs to see if they qualify for Chapter 13 in the first place.
Initially, qualifying for Chapter 13 means that the debtor meets certain eligibility requirements. Meeting Chapter 13 eligibility requirements is only half the battle. After seeing that they basically qualify, the debtor must be able to present to the court a repayment plan that is legally confirmable. Without either of these (Eligibility Requirements and Confirmable Plan), the debtor will be unable to get Chapter 13 Protection.
This article will describe 10 basic Chapter 13 qualifiers for eligibility. A brief overview of the qualifiers will give a prospective Chapter 13 debtor some insight into the process.
1. Prior Bankruptcy Discharges: Generally, you can ‘t get a Chapter 13 discharge if you already have had one within the previous two years. Additionally, you can’t get a Chapter 13 discharge if you had a Chapter 7 discharge within the previous four years. The debtor is not barred from filing a Chapter 13 in these two instances, it is just that they will not receive a discharge.
2. Chapter 13 has debt limits: If your debts are over a certain amount, then the debtor can’t file a Chapter 13. The amounts change periodically for inflation.
3. Debts may not be Contingent but can be Cosigned:
A Contingent debt is a debt you are not obligated to pay unless something happens. Thus, the creditor does not have the right to go after the debtor immediately unless the predetermined event occurs. The creditor must have the right to go after the debtor for the debt to be included in a Chapter 13.
A Cosigned debt is a debt that is joint between the cosigners and the creditor has an immediate right to seek payment. Thus, it is an equal as well as joint debt and can be included as a bankruptcy debt in Chapter 13.
4. Chapter 13 is for individuals: Thus, Business entities can’t file as the case has to be filed in the debtor’s name. However, if the debtor is a sole proprietorship, he can file the case because he is personally responsible for the debt of the income generating business. Also, the debtor can include debt regarding the business and in doing so can remain open for business while going through a difficult financial time.
5. Stay current on Income Tax Filings: The Bankruptcy Trustee will want to see that the debtor has filed their State and Federal Tax Returns for the previous four years. The Trustee will give you extra time if you need it to file the returns. However, if the debtor fails to produce the Tax Returns or their transcripts, the Trustee will ask the Court to dismiss the Chapter 13 case.
6. Alimony and Child Support Payments: The debtor must keep their current support obligations paid. The debtor can catch up with arrears. However, the arrears should be paid in full over the life of the plan with very few exceptions.
7. The Repayment Plan must pay Required debts: Required debts must be paid in full over the life of the plan. The plan must show that the debtor has the ability to pay these required debts in addition to other mandatory things. The Debtors reasonable living expenses as well as Trustee Commission payments are considered mandatory.
In short, the debtor’s income MUST have the ability to support not only the Required Debts and reasonable living expenses, it must also be able to pay the Trustee Commission.. If there is not enough income to support what must be paid, the plan will not be approved for the debtor.
8. Priority Debts: These debts are considered important enough to go to the top of the list of paid debts. Generally, these debts are unsecured and are to be paid in full over the life of the plan. Common examples of these are back taxes and support.
9. Secured Debts: All secured debts must be paid in full during the repayment plan. Judgment Liens and Tax Liens come to mind. Additionally, Liens that survive the life of the repayment plan must be paid unless the debtor is willing to surrender the collateral. Mortgages are a common secured debt that usually outlives the repayment plan.
10. Unsecured Creditors must get at least as much as they would have received if debtor used Chapter 7.
One of the main reasons for Chapter 13 is that the debtor gets to keep their property. However, debtors can’t get away with depriving Unsecured Creditors. The Unsecured Creditor must receive at least what they would have received if the debtor had chosen Chapter 7.