During these difficult economic times, we are seeing an unprecedented number of individuals seeking the help of a bankruptcy lawyer. Filing for Chapter 13 bankruptcy can be a good option for some debtors, allowing them to maintain their assets and at least partially repay creditors over an extended period. If you are being harassed by creditors and debt collectors, keep reading to find out if you might be eligible for this type of financial relief.
Chapter 13 Eligibility Chapter 13 bankruptcy can be an attractive option because it allows the debtor to keep their property, including their home and vehicles, while giving them a three- to five-year window during which they can repay their debts.
Under the U.S. Bankruptcy Code, most individuals who have not gone through a recent bankruptcy, whose debts are not excessively high, and who have filed their tax returns each year for at least the past four years, could potentially qualify. Below we will take a closer look at exactly who may or may not be able to find relief under Chapter 13.
You Must File as an Individual, Not as a Business
Only private individuals (either alone or filing jointly with a spouse) can file for Chapter 13. Businesses must instead file for Chapter 11 bankruptcy. Business owners can, however, include some business-related debts under Chapter 13, if they are personally liable for those debts. Sole proprietors might find themselves in this situation. Note that stockbrokers and commodity brokers are ineligible for Chapter 13, even if they are filing as individuals.
Your Debts are Within a Reasonable Limit
Chapter 13 is only an option if your total unsecured debt amounts to less than $419,275, and your secured debts add up to less than $1,257,850. Unsecured debt includes credit card and medical bills, while secured debt is guaranteed by collateral that can be claimed by the creditor.
You Have Not Recently Filed for Bankruptcy
If you went through a Chapter 13 bankruptcy within the last two years or a Chapter 7 bankruptcy within the last four years, you cannot file for Chapter 13. Your eligibility may resume once this time period has elapsed, assuming your other qualifying factors have remained the same.
Also note that you cannot have filed a Chapter 13 or Chapter 7 bankruptcy petition in the previous 180 days that was dismissed for reasons such as failing to comply with court orders, or not appearing in court at an appointed time.
You Have Gone Through Credit Counseling
To be eligible for Chapter 13, the debtor must fulfill a credit counseling requirement. This includes presenting the bankruptcy court with proof that you received debt counseling at least 180 days prior to filing for bankruptcy. To receive a credit counseling certificate, you must complete a course from a certified debt relief agency that is approved by the Department of Justice.
The course takes place in two parts - the first part focuses on alternatives to bankruptcy, while the second part provides details on how to better manage personal finances. The goal is to provide debtors with the skills needed to avoid future financial troubles.
You Have Filed Your Tax Returns
Debtors must show proof that they have filed both state and federal income tax returns for the past four years. While you might be able to request some extra time to pull together this documentation, if you don't produce your returns going back four years, your case will be dismissed.
Your Bankruptcy Lawyer Has Created a Debt Repayment Plan
Certain debts are considered a priority – this includes but is not limited to child support, tax liens, and mortgage payments. Your plan must also outline your intent to pay unsecured creditors for items such as furniture, appliances, jewelry, and other consumer items. While not all debts will necessarily be repaid in full, the goal is to have a plan that will repay as much as possible in order of priority. Your bankruptcy lawyer will develop a plan that is realistic for you.
You Have Reliable Income
To be eligible for Chapter 13, the debtor must have sufficient income in place to meet most obligations to creditors, albeit over an extended time frame. This includes income from all sources, even that of a spouse. The debtor must be able to show proof that they will be able to cover (at a minimum) mandatory payments to priority creditors, as well as to unsecured creditors in an amount equal in value to the debtor's non-exempt property.
Why File for Chapter 13 Bankruptcy?
Some debtors prefer to file for Chapter 7 bankruptcy because it doesn't require repayment to creditors. However, debtors will lose assets under Chapter 7, which is what makes the Chapter 13 option more attractive. Also, you might not qualify for Chapter 7 if your income is over a certain limit. Your lawyer will help you determine which option is best for you.
If you are a homeowner with overdue mortgage payments or are behind on vehicle installments, Chapter 13 can allow you to make arrear payments over a three-to-five-year period, meaning that you can keep your home and/or car. A debtor can also maintain any non-exempt property that would otherwise have to be sold if they were filing under Chapter 7 (assuming, of course, that this debt can be repaid in the three-to-five-year window).
Under Chapter 13, collection action can also be avoided during the course of the three-to-five-year repayment plan while the debtor is paying off overdue support payments, a tax bill, or other non-dischargeable debt.
A “Pay What You Can Afford” Solution
Chapter 13 allows you to make a pre-determined monthly payment that is based on your budget. This payment goes to a bankruptcy trustee, as opposed to directly to creditors, which greatly simplifies the process for the debtor. Your lawyer will work out a realistic repayment plan for you, which then must be approved by the Bankruptcy Court.
How much you can afford is determined by your discretionary income, which is what is left after essential expenses are paid. Your income from all sources is taken into account. Even if your discretionary income is quite low, a skilled bankruptcy lawyer can often work out a plan that will benefit all parties.
How to File for Bankruptcy
The first and most important step is to find a reputable bankruptcy lawyer. In the case of a Chapter 13 filing, you and your lawyer will work together to establish your eligibility for a debt reorganization plan (this will include a full disclosure of your current financial situation). Your lawyer will submit any required documentation to a bankruptcy trustee.
You will also need to provide proof that you completed a credit counseling class at this time. Your lawyer will advise you as to exactly what you need to do and what paperwork needs to be obtained. Finally, you will obtain court approval of a debt repayment plan, which can be paid in up to five years depending on your financial circumstances.
If you are overwhelmed with debt or other financial issues, contact us today at the Thomas K McKnight Law Firm in Santa Ana, CA. Our team of legal experts can help with personal finance, debt settlement, bankruptcy, and wage garnishment issues. We are a consumer rights and advocacy law firm that is well equipped to help individuals navigate difficult financial situations.