Some people know that a Chapter 13 bankruptcy can save their most treasured assets. They may have heard that Chapter 13 can be "better" than Chapter 7. Depending on your circumstances, that could be true, or false. How can you tell if you are eligible for Chapter 13 bankruptcy? And how do you know if it is the right choice for you?
In this blog post, I will review the eligibility requirements for Chapter 13 bankruptcy. I will discuss limits on debts and disposable income under Chapter 13 of the federal Bankruptcy Code, and I will lay out why you may want to see if you qualify.
In a Chapter 7 bankruptcy, the trustee assigned to your case is responsible for selling nearly all your assets as soon as possible, and distributing that money among your creditors. This gives the debtor a fresh start, but it means when the case is concluded, the debtor will only own certain property exempt from sale under the statute. If you own a home or vehicle, a Chapter 7 bankruptcy could cause you to lose that property to settle your debts.
A Chapter 13 bankruptcy can be a good option for debtors with property like houses or cars that they want to keep. Under Chapter 13, a debtor voluntarily submits to a 3 to 5 year payment plan supervised by the court that pays off some, but not usually all, of his or her debts. The payment plan does not require you to sell your assets, as long as you can make the required payments. It can even help "cure" bad payment history on your mortgage or car loan. But not everyone can qualify for a confirmed payment plan under Chapter 13.
Debtors are not automatically entitled to a Chapter 13 bankruptcy. Before they can file, they must work with a bankruptcy attorney or trustee to create a plan and determine if they are eligible. There are several eligibility requirements that each must be met for your payment plan to be confirmed and allow your case to continue.
"Artificial persons" including incorporated businesses can file for bankruptcy. However, the corporate entity will not qualify for Chapter 13 Bankruptcy. Instead, troubled businesses can use Chapter 11 to reorganize their debts. Sole proprietors, partners, and shareholders of incorporated entities can usually qualify for Chapter 13 bankruptcy as individuals, even though they own a business. In these cases, any business debts that you have personally guaranteed or are otherwise liable for will be included in the bankruptcy, but the business may still be liable even after your interest is discharged.
Before you can qualify for a Chapter 13 bankruptcy you will need to have your federal and state tax returns on hand for the last four years. This can be a problem for some debtors who have chosen to postpone filing to avoid or delay the assessment of tax debts. In some cases, you can file your tax returns while your Chapter 13 bankruptcy is pending. But that is up to the court and will delay your case. It is better to get all your tax returns up to date before you file your petition for Chapter 13 bankruptcy. Then when you file, you will provide those tax returns to the trustee. If you don't, your case will be dismissed.
One of the biggest differences between eligibility for Chapter 7 and Chapter 13 bankruptcy is the income requirement. Under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, debtors using Chapter 7 whose monthly incomes are too high are presumed to be abusing the system and their cases can be dismissed. But under Chapter 13, the question is whether you make enough money to meet the requirements of your payment plan.
To be eligible for Chapter 13 bankruptcy, you and your bankruptcy attorney will have to show that you have enough monthly income to pay all your allowed expenses and secured debts (including your mortgage and car loan) and still cover your payment plan. The income used to prove eligibility can come from:
If your total net income is above the state median, you will likely meet the disposable income requirement for Chapter 13. In Michigan, for fiscal year 2017, the estimated median income for a family of four was $77,718. Single wage earners came in at $44,072. If your family's net disposable income falls above those numbers, you may be required to make additional payments, and your plan may be extended from three to five years.
Chapter 13 of the bankruptcy code also has ceilings for secured and unsecured debt. You must fall below those ceilings to be eligible for Chapter 13 bankruptcy. As of April 2016, those upper limits were:
Generally, if you are eligible for Chapter 13 bankruptcy, you will be required to continue to pay all your secured debts throughout the payment period. Your plan will also require you to dedicate a portion of your disposable income (after allowable expenses) every month to paying off your unsecured debt.
If you have fallen behind on your payment obligations, your plan may allow you to "cure the defect" on your mortgage or car payment over the course of that time period and avoid foreclosure or repossession. When you successfully complete your Chapter 13 bankruptcy, you will still own your home and your car.
The U.S. Bankruptcy Code requires all individuals seeking a Chapter 7 or Chapter 13 bankruptcy to attend credit counseling and complete a personal financial management class. These requirements are designed to teach debtors how to budget, save, use credit, and avoid debt. Your Chapter 13 bankruptcy can't be discharged until you submit a certificate of completion for this program.
Determining whether you are eligible for Chapter 13 bankruptcy isn't always easy. You will need to review all your assets, income sources, and debts (both secured and unsecured) with an experience bankruptcy attorney to determine if you qualify, and whether a Chapter 13 bankruptcy is the right choice for you and your family.
At John A. Steinberger & Associates, P.C., we are a full-service bankruptcy law firm in Southeast MISoutheast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. If you think a Chapter 13 bankruptcy might be the best financial decision for you, call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.