Are You Eligible for Chapter 13?

Chapter 13 bankruptcy has several important restrictions. Your first step is to see whether you legally qualify for a Chapter 13 bankruptcy.

1. Businesses Can't File for Chapter 13 Bankruptcy.

Businesses including corporations and partnerships cannot file under Chapter 13. On the other hand, if you own a business as a sole proprietor, you can file for Chapter 13 bankruptcy as an individual and include the business-related debts for which you are personally liable.

2. You Must Have Stable and Regular Income.

You must have stable and regular income to be eligible for Chapter 13 bankruptcy. That doesn't mean you must earn the same amount every month. The income must be steady, likely to continue, and periodic -- weekly, monthly, quarterly, semi-annual, seasonal or even annual. Here is a list of some types of income you can use to fund a Chapter 13 plan:

$ Regular wages or salary $ Income from self-employment $ Wages from seasonal work $ Commissions from sales or other work $ Pension payments $ Social Security benefits $ Disability or workers' compensation benefits $ Unemployment benefits, strike benefits and the like $ Public benefits (welfare payments) $ Child support or alimony you receive $ Royalties and rents $ Proceeds from selling property, especially if selling property is your primary business $ Rent payments and money from roommates

3. You Must Have Some Disposable Income.

For you to qualify for Chapter 13 bankruptcy, your income must be high enough that after you pay your reasonable and necessary expenses, you have money left over to make monthly payments to the bankruptcy court for three to five years. How much money you would need “left over” to make a Chapter 13 plan work will depend on a lot of factors, including: (1) The type of debts you owe, (2) The amount you owe of each type of debt, (3) The value in your property above what can be protected by available state and federal exemptions (4) The length of time the court will allow you to run your plan, (5) The manner, amount and order in which the court decides you must pay the various types of debts, (6) How the court interprets the “good faith” test, and (7) How the Court interprets a whole host of other independent, but intersecting, laws and rules. Depending upon which state and federal district you live in, there can be wide variance on the court's interpretation of the federal and state law and rules. For instance, let's use the “good faith” test as an example, which requires that your Chapter 13 plan be formulated and filed in “good faith”. Some Courts interpret “good faith” to allow you to repay virtually nothing on unsecured debts. A minority of Courts will push you to repay as close to 100% of your unsecured debts as possible. Most courts fall somewhere in between.  In the Central District of Mississippi, there isn't an unofficial rule. Each Chapter 13 plan is reviewed closely by the Chapter 13 trustee and judge to make sure you are committed the repay the most you reasonably can pay.

To figure out how much “disposable income” you have available to fund a Chapter 13 plan, the first thing you have to do is work up a budget of all reasonable and necessary monthly living expenses. This is no easy task. Why? What you may think is reasonable and necessary may not "jive" with what your court or trustees think. What is reasonable and necessary depends in part on where you live, but also depends upon the interpretation of these words by your court and trustees. The result can even be different from judge to judge and trustee to trustee. So how do you figure it out? Easy! Hire an experienced, full-time, bankruptcy attorney, who appears in front of your court and trustee daily. He or she will know what will pass muster and what will NOT.

4. Your Total Debts Must Not Be Too High. You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $1,010,650.00 (as of 2009). A debt is secured if you stand to lose specific property if you don't make your payments to the creditor. Home and car loans are the most common examples of secured debts. A debt might also be secured if a creditor such as the IRS has filed a lien (notice of claim) against your property.

In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $336,900.00 (as of 2009). An unsecured debt is any debt for which you haven't pledged collateral. The debt is not related to any particular property you possess, so failure to repay the debt will not entitle the creditor to repossess property. Most debts are unsecured, including bank credit card debts, medical and legal bills, student loans, back utility bills and department store charges.

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