Chapter 13 Bankruptcy Eligibility Essentials

Chapter 13 bankruptcy isn’t for everybody. Chapter 13 bankruptcy law calls for utilizing your income to pay back most or all of your debt. So, you’ll have to certify to the court that you’re capable of fulfilling your payment responsibilities. If your income is sporadic or excessively low, the court might not allow you to file under Chapter 13 bankruptcy law.

If your total debt burden is too high, you’re also ineligible to file under Chapter 13 bankruptcy law. Your secured debts can’t be greater than $1,010,650. A “secured debt” is one that gives a creditor the right to take away a particular piece of property (like your house or auto) if you don’t pay off the debt. Your unsecured debts can’t be more than $336,900. An “unsecured debt” doesn’t allow your creditor the ability to take your properties.  An example of an “unsecured debt” is a credit card or a medical bill.

The eligibility requirements of a Chapter 13 bankruptcy are covered in detail in Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time.

Starting a Chapter 13 Bankruptcy

Prior to filing a Chapter 13 bankruptcy, you must complete credit counseling from an agency sanctioned by the United States Trustee’s office. These agencies are permitted to charge a fee for their services.  But, if you can’t afford to pay the fee, they have to provide cut rate counseling and, in a few cases, free counseling.

Chapter 13 Repayment Plans

The most important part of your Chapter 13 bankruptcy paperwork is your repayment plan. It traces in detail how much money you’ll pay to every one of your debts. There’s no authorized form for the plan.  But, nearly all courts render their own forms.  To learn more about Chapter 13 Bankruptcy repayment plans, read Chapter 13 Bankruptcy: Keep Your Property & Repay Your Debts Over Time.

How Much Will You Need to Pay

Your Chapter 13 plan must pay off certain debts fully. These debts are called “priority debts” because they’re believed important enough to leap to the head of the bankruptcy repayment line. Priority debts include child support and alimony, wages you owe to employees, and certain tax obligations.  Additionally, your plan must include your usual payments on secured debts.

The plan must show that any income you have left over after making these expected payments will go toward paying back your unsecured debts.  You don’t have to pay these unsecured debts in full.  You merely have to show that you’re applying any remaining income towards their repayment.

How Long Will You Make Repayment

The duration of your repayment plan turns on how much you earn and how much you owe. If your typical monthly income during the six months prior to the date you filed for bankruptcy is more than the average income for your state, you’ll want to propose a five-year plan. If your income is less than the median, you may offer a three-year plan.

Regardless of how much you earn, your plan terminates when you pay back all of your debts fully, even if you’ve not arrived at the three- or five-year mark.

What Occurs If You Can’t Make Plan Payments

If you sustain a job loss after initiating a payment plan or ascertain that you can’t keep up the payments on your Chapter 13 bankruptcy plan, the bankruptcy trustee may modify your plan.  It’s even feasible that the court could permit the discharge of your debts on the ground of hardship.  Hardship may include the abrupt loss of a job due to a company closing or a severe debilitating sickness.  If the bankruptcy court won’t permit you to alter your plan or permit you a hardship discharge, you may be able to change over to a Chapter 7 bankruptcy. 

How Does a Chapter 13 Case Conclude

After you complete your repayment plan, every leftover debt that’s eligible for a discharge is canceled out. But, before you’ll be able to obtain a discharge, you must demonstrate to the court that you’re current on your child support responsibilities and that you’ve completed a budget counseling course with an agency licensed by the United States Trustee. This budget counseling course is in addition to the required credit counseling you fulfill prior to filing for bankruptcy

Specified Eligibility for Chapter 7 Bankruptcy

Under the former bankruptcy laws, you were permitted to choose the type of bankruptcy that seemed best for you.  In nearly all cases that would be a Chapter 7 bankruptcy settlement instead of a Chapter 13 bankruptcy repayment. But, if you’re in a high income bracket, the new bankruptcy laws won’t permit you to use Chapter 7 bankruptcy.

To check out whether you’re able to file Chapter 7 bankruptcy under the new bankruptcy laws, you must first measure your “current monthly income” against the average income for a family of your size in your state. If your income is lower than or equal to the median, you’ll be able to file for Chapter 7 bankruptcy. If it’s greater than the median, however, you must pass a new test to file for Chapter 7 bankruptcy.  The new test is called “the means test.”

The intention of the means test is to ascertain whether you have enough available income, after subtracting certain permitted expenses and required debt payments, to make payments on a Chapter 13 program. To determine whether you pass the means test, you subtract certain allowed expenses and debt payments from your current monthly income. If the money that’s remaining after these calculations is less than a specific sum, you’ll be able to file for Chapter 7.

Counseling Requirements

Before filing for bankruptcy under either Chapter 7 or Chapter 13, you must complete credit counseling with an agency authorized by the United States Trustee’s office. The reason for this counseling requirement is that it helps you in finding out whether you actually need to file for bankruptcy or whether an informal repayment plan will help you regain your financial stability.

Counseling is mandatory even if it’s obvious that a repayment plan isn’t feasible for you.  You’re expected just to participate in the counseling.  You don’t have to agree with any repayment plan the agency provides. Even so, before you’ll be able to file bankruptcy, you’ll have to introduce any repayment plan the agency provides along with a certificate evidencing that you finished the counseling.

Toward the conclusion of your bankruptcy case, you’ll have to go to a different counseling session.  This counseling session is designed to teach you personal financial management skills. You can’t receive the discharge that wipes out your debts until you show proof to the court that you completed this requirement.

Attorneys Might Be Tougher to Retain — and Lots More Expensive

The new bankruptcy laws do add numerous complex requirements to bankruptcy cases. Some of these new requirements impose more responsibilities on attorneys leading to bankruptcy cases being more time intensive. Among the major new requirements on attorneys is that they must now personally ensure the truth of all the info their clients give them.  That extra demand means that lawyers must spend a great deal of time on each bankruptcy case.  Therefore, they’ll bill more to handle every bankruptcy case.   The new bankruptcy law requirements have in reality pushed a few bankruptcy lawyers out of the field altogether.

Some Chapter 13 Filers Will Have to Exist on Less

When you filed Chapter 13 bankruptcy under the previous bankruptcy laws,  you had to contribute all of your usable income to your repayment plan.  The old bankruptcy laws defined available income as that which you had remaining after paying your real living expenses. The new bankruptcy laws have changed this computation.  While you still must hand over all of your usable income, if your income is larger than the median in your state, you don’t get to figure your spendable income based on your real expenses.  Instead, you have to work out your usable income utilizing allowed expense totals established by the IRS. And these allowed expense totals must be subtracted from your average income during the six months before filing bankruptcy, not from your earnings every month.

Additional Changes

There are additional changes that can impact you negatively if you’re filing or looking at filing bankruptcy.  For plain-English guidance in the new bankruptcy laws, get a copy of The New Bankruptcy: Will It Work for You?