Learn whether you can file for Chapter 13 bankruptcy.
COVID-19 Update: Stimulus Proceeds Aren’t Income in Bankruptcy
Under Section 1113 of the CARES Act, “…payments made under the Federal law relating to the national emergency declared by the President under the National Emergencies Act…with respect to the coronavirus disease 2019 (COVID-19)…” are not included as part of current monthly income or disposable income when filing for bankruptcy. This temporary change will remain in effect until March 25, 2021.
Find more details, as well as links to newly-revised bankruptcy forms, in CARES Act Stimulus Payments Don’t Affect Bankruptcy Qualification.
Qualifying for Chapter 13 Bankruptcy
The benefit of this chapter is that you repay some of your debts—but usually not all—over the course of a three- to five-year repayment plan. But before the court confirms (approves) your plan, you must fill out the official bankruptcy paperwork and prove that you are:
- up-to-date on tax filings
- within debt amount limitations
- employed and have enough income to cover the required monthly payment, and
- an individual, not a business (however, all financial aspects of a sole proprietor’s business get included in the bankruptcy).
Your Income Tax Filings Must Be Current
To file for Chapter 13, you will have to submit proof that you filed your federal and state income tax returns for the four tax years prior to your bankruptcy filing date. If you need some time to get current on your filings, the court can postpone the proceedings (but you don’t want to count on this). Ultimately, however, if you don’t produce your returns or transcripts of the returns for those four years, your Chapter 13 case will be dismissed.
You Must Have Sufficient Disposable Income
To qualify for Chapter 13, you will have to show the bankruptcy court that you will have enough income, after subtracting certain allowed expenses and required payments on secured debts (such as a car loan or mortgage), to meet your repayment obligations. Your plan must pay back certain debts in full, or the judge will not confirm (approve) it and allow you to proceed. (For more information, see The Chapter 13 Bankruptcy Repayment Plan. )
You can use the income from the following sources 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, and
- proceeds from selling property, especially if selling property is part of your primary business property.
If you are married, your income does not necessarily have to be “yours.” A nonworking spouse can file alone and use money from a working spouse as a source of income. And an unemployed spouse can file jointly with a working spouse.
Why File for Chapter 13 Bankruptcy?
It’s true that many people prefer to file for Chapter 7 bankruptcy because it doesn’t require the filer to pay back creditors. But some debtors simply don’t qualify. Others, however, choose to file for Chapter 13 bankruptcy because it provides options that Chapter 7 doesn’t offer, making a Chapter 13 case the better choice.
Here’s a list of common reasons a debtor might file a Chapter 13 case:
- A debtor whose income exceeds the Chapter 7 means test maximum isn’t eligible to receive a Chapter 7 discharge and wipe out qualifying debt.
- A homeowner who is behind on a mortgage payment can pay the arrearages over three to five years and keep the house (the same holds true for an overdue car payment).
- A debtor can prevent a collection action such as a wage garnishment while paying off a tax bill, overdue support, or other nondischargeable debt in a repayment plan.
- A debtor can keep nonexempt property that would otherwise get sold in a Chapter 7 bankruptcy (but the debtor will need to pay for the nonexempt portion in the three- to five-year repayment plan).
Your Debts Can’t Be Too High
You won’t qualify for Chapter 13 bankruptcy if your secured and unsecured debt exceed certain amounts. (The debt figures change every three years. You’ll find the current numbers in What Are Chapter 13 Bankruptcy Debt Limitations?)
A debt is secured if you stand to lose specific property if you don’t make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor—such as the IRS—has filed a lien (notice of claim) against your property.
An unsecured debt doesn’t give the creditor a right to take a particular piece of property. Most debts are unsecured, including credit card debts, medical and legal bills, back utility bills, and department store charges. (Learn more by reading Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority.)
Businesses Not Allowed in Chapter 13 Bankruptcy
A business cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts. (An exception exists, however: Although a sole proprietor cannot file in the name of the business, both business and personal debts are the responsibility of the individual, and therefore, are included in the bankruptcy filing. Therefore, Chapter 13 can effectively help reorganize a sole proprietor’s business.)
You can, however, file for Chapter 13 bankruptcy as an individual even if you own a business. You’ll include business-related debts for which you are personally liable in your Chapter 13 bankruptcy case. But, the business will remain liable for the debt. (Again, the result is different if you’re a sole proprietor—both the individual and business debt liability will be handled by the bankruptcy.)
Important Note: Stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if they want to discharge only personal (nonbusiness) debts.
How to File for Chapter 13 Bankruptcy
You’ll disclose all aspects of your financial condition, including your income and expenses, assets, creditors, and previous transactions in the official bankruptcy paperwork. The case will start once you file your forms and other necessary items, such as a filing fee and proof that you completed a credit counseling class. You’ll have fourteen days to submit your Chapter 13 repayment plan unless you receive an extension from the court.