Do You Qualify for Chapter 13 Bankruptcy?
- Debt Limits
- There are debt limitations for Chapter 13 cases. A debtor with more than $394,725 of unsecured debt (credit cards, medical bills, loans without collateral, etc.) or $1,184,200 in secured debt (home loans, car loans, loans with collateral, etc.) is typically unable to confirm their proposed Chapter 13 repayment plan.
- Getting a Plan Confirmed
- In order for a debtor to have their proposed plan accepted or “confirmed” by the bankruptcy court, the debtor must be able to show that the plan is feasible (that he or she has sufficient regular income to support the payments under the plan) and that the repayment plan is proposed in good faith. Debtors with verifiable regular income, and who can attest that they have some money left over each month after their monthly expenses, will most times be able to have their proposed plan confirmed. Thus, Chapter 13’s are often referred to as wage earner plans.
- However, debtors are also allowed to propose a plan that relies in part on contributions from other sources such as family members. If a debtor’s family member is willing to assist in the plan payments, a debtor may propose a plan that includes income from that family member in order to qualify and have a plan confirmed by the bankruptcy court.
- In order for a debtor to have their proposed plan accepted or “confirmed” by the bankruptcy court, the debtor must be able to show that the plan is feasible (that he or she has sufficient regular income to support the payments under the plan) and that the repayment plan is proposed in good faith. Debtors with verifiable regular income, and who can attest that they have some money left over each month after their monthly expenses, will most times be able to have their proposed plan confirmed. Thus, Chapter 13’s are often referred to as wage earner plans.
Why is 13 Called a Repayment Plan?
Chapter 13 is regularly called a repayment plan because a debtor proposes a plan to the bankruptcy court to repay creditors over 36 to 60 months. A debtor is not required to pay his or her creditors in full over the term of the repayment plan in a Chapter 13 and many times will pay back significantly less than the total amount owed to various creditors. Once a debtor has completed payments under their plan (for 36 to 60 months), any remaining dischargeable debt is deemed discharged and the debtor is no longer liable for such debt.
- Unlike a Chapter 7, a debtor’s property is not subject to liquidation in a Chapter 13. Thus, a debtor who may not be a good candidate for a Chapter 7 because he or she has too much property may be a good candidate for Chapter 13.
Why Chapter 13 Instead of Chapter 7 Bankruptcy?
Bluntly, many debtors would rather file under Chapter 7 and be done with their case and be relieved of their debt in a short period rather than be involved in a bankruptcy for up to 60 months. However, not all people qualify for Chapter 7 and further, some debtors who qualify for Chapter 7 elect to file under Chapter 13 because it provides them a larger benefit. Some examples of reasons to file 13 instead of 7 are:
- A debtor may strip a junior lien (second, third, etc. mortgage) on their primary residence in a Chapter 13.
- Aka – avoid a wholly unsecured consensual lien against their residence.
- This cannot be done currently in a Chapter 7 in California.
- A debtor may stop a foreclosure and repay missed mortgage payments over up to 60 months.
- While a Chapter 7 may stop a foreclosure temporarily, a Chapter 13 has the potential to stop a foreclosure altogether and allow the debtor to bring the mortgage current over time.
- This is an amazing tool for a debtor who may have had a decrease in income and missed multiple mortgage payments over time, but whose income has now recovered.
- Chapter 13 provides the debtor an option other than curing all the missed payments to the mortgagor in one massive payment in order to avoid losing the home.
- While a Chapter 7 may stop a foreclosure temporarily, a Chapter 13 has the potential to stop a foreclosure altogether and allow the debtor to bring the mortgage current over time.
- A debtor with a significant amount of nondischargeable tax debt may use Chapter 13 to repay the IRS or the FTB (or both) over 60 months and pay little or nothing to other unsecured creditors.
- Since nondischargeable tax deficiency assessments owed the IRS and/or FTB are often determined to be priority unsecured claims in bankruptcy proceedings, they are paid before a debtor’s general unsecured creditors (credit cards, medical bills, etc.).
- Therefore, a debtor with significant tax debt could propose a Chapter 13 plan where only the IRS and/or FTB priority unsecured claims are paid over the term of the plan. Any other general unsecured debt remaining at the completion of the plan is then discharged and the debtor won’t have paid those general unsecured creditors even a penny.
As with the Chapter 7 analysis regarding eligibility seen here, there are a multitude of other factors that must be assessed when determining if a particular debtor is a good Chapter 13 candidate. However, the above-detailed information is a good starting point. If you believe that you are a viable candidate for Chapter 13 based on the information above, please contact a competent bankruptcy attorney for a full consultation based on your detailed circumstances.
READ MORE ABOUT IDEAL CHAPTER 13 BANKRUPTCY CANDIDATES HERE!
Contact a knowledgeable bankruptcy attorney at Spaulding Law Group at (714) 731-7595 and we can assess if Chapter 13 is right for you!
