Filing for Chapter 13 bankruptcy can help you keep your house or car when you’re behind on payments. It works by allowing you to catch up on some debts—such as your home or car loan—while paying less on unsecured debt, such as credit card bills or student loans. It will also hold off creditors while you pay off other types of nondischargeable debt—debt that won’t go away in bankruptcy—such as back taxes and overdue domestic support obligations (spousal and child support). However, before you can take advantage of this chapter, you must be able to show that your income will fund a monthly repayment plan for three to five years. Additionally, your debt can’t exceed certain amounts (more below). In this article, you’ll learn about qualifying for relief under Chapter 13 bankruptcy.
(Do you want to start from the beginning? Learn the fundamentals by reading Chapter 13 Wage Earner Bankruptcy Basics.)
You Must Have Regular (and Sufficient) Income to Fund a Repayment Plan
One hurdle that prevents many people from using this bankruptcy type is the need to prove that you have a revenue stream that’s sufficient to cover your required monthly plan payment. If you’re unable to do so, the court will not confirm (approve) your repayment plan.
Example 1. Suppose that you were out of work due to an illness and fell behind on both your house and car payment. Now that you’re working again, you want to file for Chapter 13 bankruptcy and catch up on the payments. To do so, you must show that you have enough monthly income to keep up on your mortgage and car loan, as well as catch up on any arrearages (you’ll spread the past due amount over the course of a three- to five-year payment plan). If you don’t have enough incoming funds to make the payments, the court won’t confirm your plan.
But it doesn’t end there. It’s common to have other priority debts—such as child support arrearages or tax debt—that you’ll have to repay fully over the life of your plan. If your balance is high enough, it will increase your required payment dramatically.
Example 2. Jeff is facing a wage garnishment for a large credit card balance. He wants to file for Chapter 13 bankruptcy so that he can stop the garnishment and pay off a nondischargeable debt over time—$60,000 in child support arrearages. He’s hoping that he’ll be able to pay off the arrearages and discharge the credit card balance after completing his plan. The arrearage portion of Jeff’s monthly payment will be $1,000 per month over five years (plus trustee fees). If he can show that he has sufficient monthly income to make his payment, he’ll be able to get his plan confirmed. Whether he’ll have to pay an additional amount toward his credit card debt will depend on how much extra (discretionary) income is left after paying his necessary bills and the arrearage payment.
Finally, you might have a significant amount of nonexempt property (assets that you can’t keep pursuant to your state exemption statutes)—like unprotected equity in your home. In that case, you’ll need to pay your unsecured creditors (those with debts not secured by collateral, such as your credit card balance) at least as much as the value of the nonexempt assets over the course of your plan.
Example 3. Suppose that you have $200,000 in nonexempt equity in your house. In that case, you’d need to pay your unsecured creditors $3,333 per month for 60 months. That type of payment can be difficult for many people to make, and if you don’t have sufficient income to pay it, you might be forced to forgo bankruptcy and sell the house to pay off your creditors.
To find out how much income you’ll need for your particular plan—as well as how much debt you might be able to discharge (wipe out) after completing your payments—you’ll want to consult with a knowledgeable bankruptcy attorney.
Your Income Will Determine the Length of Your Plan
Whether you’ll pay into a three- or five-year plan will depend on the amount of money that you make. If your income is less than the median income in your state, your plan will last for three years. Conversely, if your income exceeds the state median, you’ll pay into a five-year plan.
Your Debt Can’t Exceed Certain Debt Limits
Your debt cannot exceed the following limits (as of 2016):
- $394,725 in unsecured debt (such as student loans, credit card balances, and utility bills), and
- 1,184,200 in secured debt (typical examples include a mortgage or car loan).
If you have more than the above amounts, you’ll have to file for Chapter 11 bankruptcy. (To learn more, read What Is an Individual Chapter 11 Bankruptcy?)
Seeking Bankruptcy Counsel
Addressing all factors that go into a Chapter 13 plan is beyond the scope of this article. A knowledgeable attorney can evaluate your case, estimate your monthly plan payment, and determine whether you make enough to complete a repayment plan.
Questions for Your Attorney
- How much will I have to pay if I file for Chapter 13 bankruptcy?
- Do I have enough income to meet the monthly payment?
- Would Chapter 7 bankruptcy be a better option?