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Who Can File Chapter 13?

Posted on Apr 18, 2014 in Bankruptcy, Chapter 13

Typically, individuals who file bankruptcy have a choice between filing a chapter 7 “liquidation” and a chapter 13 “reorganization”. Individuals who are determined to have disposable income under the Means Test only have the option of filing chapter 13 and repaying their creditors. However, individuals still have to meet certain eligibility requirements to file chapter 13.

First, only individuals may file chapter 13. Small businesses and corporations can only reorganize under chapter 11. Chapter 13 was designed to be a simpler, more efficient way to reorganize and therefore is only available to individuals. Furthermore, stockbrokers and commodity brokers are excluded from filing chapter 13.

Second, individuals filing chapter 13 must have “regular income”, i.e. wages, business or rental income, alimony or child support, or retirement income. In other words, a chapter 13 repayment is not possible if there is no consistent source of income to repay creditors.

Finally, when filing chapter 13, an individual cannot have more than $383,175 in unsecured debt and cannot have secured debts totaling more than $1,149,525. The debt limit includes non-dischargeable debt like student loans. Again, this reinforces the idea that chapter 13 is meant to be a simpler version of chapter 11 and the more debt a person has, the more complicated their bankruptcy will likely be.

Only secured and unsecured debts that are “noncontingent and liquidated” count toward the debt limit. For example, Client A was being sued for $700,000 at the time he filed chapter 13 so he did not exceed the unsecured debt limit because the lawsuit was still pending. In Client A’s case, the money owed was contingent on entry of a judgment. If Client A had wanted to file bankruptcy after a judgment for $700,000 was already entered against him, he would no longer be eligible to file chapter 13.

In a real estate market with many people’s homes underwater, it is important to note that when your house is worth less than your mortgage(s), the amount of negative equity counts toward the unsecured debt limit. For example, Client B owns a house worth $100,000 and has a mortgage with a balance of $150,000 on it. The undersecured portion of the mortgage, $50,000, counts toward Client B’s unsecured debt. So, if Client B has $350,000 in unsecured debt, by adding $50,000 to the unsecured debt, Client B is now over the unsecured debt limit by almost $17,000.

If you are interested in reorganizing in bankruptcy, it is important to consult with an attorney. If your debts exceed the limits in chapter 13 and you make too much money to file a chapter 7, then your only bankruptcy option is chapter 11.

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