You are eligible for Chapter 13 bankruptcy if you meet a few broad criteria.
Unlike Chapter 7 bankruptcy, Chapter 13 does not require that you “pass” a Means Test to obtain its protection. You are eligible for Chapter 13 bankruptcy in Livonia, Detroit, Farmington, Southfield, Dearborn, Westland, Inkster, and elsewhere in Michigan, simply, if you earn enough money to complete a Chapter 13 process.
What does that mean, however?
This Article will discuss the circumstances under which you will be eligible for Chapter 13 bankruptcy. It will, along the way, discuss some basics about the Chapter 13 bankruptcy process as well.
In fact, we will start with those basics so that the rest of the discussion makes more sense.
How Does the Chapter 13 Bankruptcy Process Work?
To understand whether or not you are eligible for Chapter 13 bankruptcy, you need to understand a little about what Chapter 13 is and how it works.
What follows, here, is just a brief description of the mechanics of the Chapter 13 bankruptcy process.
Chapter 13 Bankruptcy: Reorganizing Your Debt
Chapter 13 bankruptcy is a “reorganization” process that allows you to repay the amount of debt that you can afford to pay—only.
For 3-5 years, in Chapter 13, you make a monthly payment equivalent to the amount of income you have left over every month after necessary household expenses. You make this payment not to your creditors but to the Chapter 13 Trustee assigned to your case. With some exceptions, you do not pay anything directly to your creditors.
The Chapter 13 Trustee takes that payment and pays your debts in this order:
- The Chapter 13 Trustee’s own fees;
- Your Metro Detroit bankruptcy attorney’s fees;
- Your secured debts, such as mortgages and mortgage arrearages;
- Any contract or lease payments (rent, lease vehicle payments);
- “Priority” unsecured debt such as child support or recent tax debt;
- Everyone else.
That last “everyone else” umbrella includes all of your unsecured debt. This means credit card debt, medical debt, personal loans, back rent or utility arrearages, student loans, and more.
With some exceptions (looking at you, student loans!), your last-to-be-paid, non-priority unsecured creditor simply receive whatever is left over after your monthly payments are made, after everyone else is paid.
If the unsecured creditors get 2 cents, great. (With some exceptions, that is. The Chapter 13 Means Test or high value assets can require that unsecured creditors receive some minimum amount.)
So Am I Eligible for Chapter 13 Bankruptcy?
Bearing this description in mind, logic dictates that you meet a few practice criteria for a Michigan Chapter 13 bankruptcy process.
You Must Have Regular Income
In order to make a Chapter 13 Plan payment every month for 3-5 years, you must, naturally, have a regular and predictable source of income.
The Chapter 13 Plan payment is, as noted, whatever remains from your household take-home pay after your household’s necessary monthly expenses are deducted.
What is and is not a “necessary” household expense is outside of the scope of this Article. Suffice it to say, the Chapter 13 Trustees, particularly in Detroit, will object to any expense perceived to be inflated or unnecessary.
Likewise, the Chapter 13 Trustees will require documentation regarding your sources and amounts of income. They look for the possibility that income is being under-reported in addition to the possibility that it just isn’t there in sufficient amount at all.
If you are a wage-earning employee who receives a traditional paycheck every week or bi-weekly, this is all easy enough to establish and satisfy.
If you are self-employed or a business owner or have a spouse who is self-employed or a business owner, be prepared for a bit of an argument with your Chapter 13 Trustee.
You Must Have Enough Disposable Income to Make a Payment
You will not be eligible for Chapter 13 bankruptcy if you do not have enough money each month with which to make a Plan payment.
Functionally, a Chapter 13 bankruptcy requires that you earn a little more than you spend each month. If you tighten your budget as much as possible and strip out all unnecessary expenses and still end up with negative disposable income, Chapter 13 will not be a realistic option for you.
If you need a Chapter 13 to stop your foreclosure or deal with debt that is not dischargeable in Chapter 7 bankruptcy, you may need a second job or to increase your income in some other manner.
However, talk to an experienced Metro Detroit bankruptcy lawyer first. Don’t make drastic lifestyle changes without the proper bankruptcy guidance.
Bankruptcy “self-help” nearly always results in a bankruptcy case that is more complicated than it needed to be.
Likewise, don’t presume that you are not eligible for Chapter 13 on this basis, either. A Michigan bankruptcy attorney can also review your budget with you and help you to truly determine whether it can be adjusted in order to make a Chapter 13 filing possible or not.
Additional Legal Chapter 13 Eligibility Requirements
The US Bankruptcy Code also has a few rules determining whether you are eligible for Chapter 13 bankruptcy.
These “legal” restrictions on who is and isn’t eligible for Chapter 13 bankruptcy stand in contrast to the “practical” restrictions above. That is, they are etched in law.
The Bankruptcy Code is the Federal statute that governs the bankruptcy process. It includes a few rules regarding who is or isn’t eligible for Chapter 13.
These “legal” eligibility rules are as follows:
You Must Be an Individual (Not a Business)
Chapter 13 is not an appropriate form of bankruptcy for corporations or other entities. It is a debt reorganization process for live, warm human beings only.
If your last name is, “Incorporated,” you’ll need to file a Chapter 11 bankruptcy instead.
Limits on Debt Amounts
If you owe too much money, you will not be eligible for Chapter 13 bankruptcy. The Chapter 13 “debt limits” are adjusted every so often. This Chapter 13 eligibility requirement is widely criticized as serving no general purpose and for enforcing limits that are too low.
Regardless, the current Chapter 13 debt limit is a combined of $2,750,000.
Previously, debt limits varied, depending upon whether the debt was secured or unsecured. This is no longer the case due to Congressional legislation enacted earlier this year.
What are your options if you exceed this debt limit and are not eligible for Chapter 13?
This should be discussed in a private consultation with an experienced bankruptcy attorney. Generally, however, your remaining bankruptcy options will be a Chapter 7, if feasible, or an individual (human) Chapter 11.
Credit Counseling Required
To be eligible for Chapter 13 or Chapter 7 bankruptcy, you must also have completed a pre-filing credit counseling course.
This requirement is one of the most stupid Bankruptcy Code revisions enacted with the 2005 BAPCPA Code amendment enacted by Congress.
The online, 1-hour “credit counseling” course will eat up $25 of your hard-earned money, waste an hour of your time, and then duly advise you that you possibly need to earn more money or even file for bankruptcy.
File under “Duh.”
Fingers crossed that the Bankruptcy Code is further amended to strike this moronic mandate. Until then, however, you must complete the course.
Your bankruptcy lawyer will point you in the direction of a course provider who will, hopefully, not give you any egregiously offensive feedback, at least.
Prior Chapter 13 Filing & Dismissal Issues
Finally, you will not be eligible for Chapter 13 or Chapter 7 if a prior bankruptcy case was dismissed, within the prior 180 days, after you willfully failed to appear for court or failed to comply with court orders.
Likewise, you are not eligible for Chapter 13 if you voluntarily dismissed your prior case within the past 180 days after creditors attempted to recover property upon which they held liens. That is, if you may have filed a prior Chapter 13 in “bad faith” to simply slow a legal Michigan foreclosure and then dismissed the Chapter 13 voluntarily as soon as your mortgage servicer filed a motion to proceed with the foreclosure—it looks bad.
You won’t get a second crack.
Aside from such bad faith issues, you can file a Chapter 13 but not be eligible for a discharge under the following circumstances:
- A Chapter 7 filed (with discharge successfully awarded) within the past 4 years;
- A Chapter 13 filed within the past 2 years.
The reason for doing this is to force your creditors into the Chapter 13 payment plan for the next 5 years. Presumably, you intend to repay 100% of your debt in this way as the unpaid balance would remain (plus accrued interest) without the discharge at the end.
It’s an option.
Contact a Livonia, Michigan Bankruptcy Attorney Now
If you are considering filing for Chapter 13 bankruptcy in Metro Detroit, Ann Arbor, Flint, Bay City, or elsewhere in Michigan, you need to consult an experienced bankruptcy attorney to review your options.
Offering free, virtual consultations and friendly, one-on-one service from Livonia bankruptcy attorney John Hilla, we will ensure that your matter is handled properly, competently—and with kindness.