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Are You Eligible for Chapter 13?

Chapter 13 bankruptcy has several important restrictions. Your first step is to see whether or not you legally qualify for a Chapter 13 Bankruptcy.

1. Businesses Can't File for Chapter 13 Bankruptcy.

   Corporations and Partnerships cannot file under Chapter 13. On the other hand....if you own a business as a sole proprietor...however....you can file for Chapter 13 bankruptcy as an individual and include the business-related debts for which you are personally liable.
   
   

2. You Must Have Stable and Regular Income.

   You must have stable and regular income to be eligible for Chapter 13 bankruptcy. That doesn't mean you must earn the same amount every month. But the income must be steady -- that is, likely to continue and it must be periodic -- weekly, monthly, quarterly, semi-annual, seasonal or even annual. Here is a list of some types of income you can use 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 your primary business;
   $ Rent payments and money from roommates.
   
   
   

3. You Must Have Some Disposable Income.

   For you to qualify for Chapter 13 bankruptcy, your income must be high enough so that after you pay for your basic human needs, you are likely to have money left over to make periodic (usually monthly) payments to the bankruptcy court for three to five years. How much money you would need to have "left over" in order to make a Chapter 13 plan work will depend on a lot of factors, including: (1) The type of debts you owe, (2) The amount you owe regarding each type of debt, (3) The value in your property above what can be protected by available State and Federal exemptions, (4) The length of time your Court will allow you to run your plan, (5) The manner, amount and order in which your Court decides to pay out the various types of debts, (6) How your Court interprets what is known as the "good faith" test, and (7) How your Court interprets a whole host of other independent, but intersecting, laws and rules. 
   
   Fortunately or unfortunately...depending upon which State and Federal District you live in....there can be wide variance from Court to Court, based on the Court's interpretation of the Federal and State law and rules.  For instance, let's use the "good faith" test as an example, which requires that your Chapter 13 plan be formulated and filed in "good faith".  Some Courts interpret "good faith" to allow you to repay virtually nothing on unsecured debts.  A minority of Courts will....on the other hand....push you to repay as close to 100% of your unsecured debts as possible. Most courts fall somewhere in between.  In the Central District of California there is no unofficial rule. Each Chapter 13 plan is reviewed closely by the Chapter 13 Trustee and the Judge to make sure you are committing the repaying the most you reasonably can pay.

   To figure out how much "disposable income" you have available to fund a Chapter 13 plan, the first thing you have to do is work up a budget of monthly living expenses. This itself is no easy task.  Why?  Because what you may think is reasonable or necessary may not at all "jive" with what your Court or your Trustees may think. You see...your budget of living expenses can only include items that are "reasonable or necessary".  What is "reasonable or necessary" depends in part on where you live, but also depends upon the interpretation of these words by your Court and your Trustees.  The result can even be different from Judge to Judge and Trustee to Trustee.  So how do you figure it out?  Easy!  Hire an experienced, full-time, bankruptcy attorney, who appears in front of your Court and your Trustee on a daily basis.  He or she will know what will pass muster...and what will NOT.

   
   
   

4. Your Total Debts Must Not Be Too High.
   
   You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $871,550.00 (as of year 2004). 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.

   In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $290,525.00 (as of year 2004). An unsecured debt is any debt for which you haven't pledged collateral. The debt is not related to any particular property you possess, and failure to repay the debt will not entitle the creditor to repossess property. Most debts are unsecured, including bank credit card debts, medical and legal bills, student loans, back utility bills and department store charges.