Qualifying for the Tremendous Tools of Chapter 13

You may want the fast fresh start of a Chapter 7 case, but sometimes your circumstances scream out for a Chapter 13 instead.  It’s true—for some people Chapter 13 provides tremendous tools not available under Chapter 7. Now all you have to do is qualify for it.

Qualifying for Chapter 13 is completely different than qualifying for Chapter 7. You 1) can’t have too much debt, and 2) must be “an individual with regular income.”


Too Much Debt

There is no limit how much debt you can have if you file a Chapter 7 case. But under Chapter 13 there IS a strict maximum debt amount. The idea is that Chapter 13 is a relatively straightforward and efficient procedure designed for relatively simple situations. If there’s a huge amount of debt, the theory is that you need a more complicated procedure, Chapter 11, which is arguably ten times more elaborate (and about that many times more expensive!).  

So Congress has come up, rather arbitrarily, with a strict debt maximum to qualify for Chapter 13. Actually, there are two separate maximums, one for unsecured debt and another for secured debt. You’re thrown out of Chapter 13 if you exceed either amount.

The current maximums are $1,081,400 for secured debt and $360,475 in unsecured debts. Those same numbers apply whether you are filing by yourself or with a spouse.

These amounts may sound like way beyond what most consumers would owe, and in fact they do not cause most people a problem. But these limits are problematic more than you might think. Consider if you owed a normal amount of debt and then were hit with a catastrophic medical emergency and/or very serious ongoing condition that quickly exhausted your medical insurance. A few hundred thousand dollars of medical debts can add up faster than you can believe.  

Other potentially troublesome situations, particularly for the unsecured debt limit, include if you’ve owned a business, or are involved in serious litigation. Or if you own real estate, especially more than just your primary residence, the secured debt limit can also be reached quickly, especially in certain part of the country.


“Individual with Regular Income”

First, corporations and partnerships can file Chapter 7s, but not 13s—you must be an “individual.”

Second, the Bankruptcy Code defines—not very helpfully, mind you—“individual with regular income” as someone “whose income is sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13.”  That’s sounds like a circular definition—your income is regular enough to qualify to do a Chapter 13 case if your income is regular enough to do a Chapter 13 case!? Such an ambiguous definition gives bankruptcy judges a great deal of discretion about how they enforce this requirement. Some are pretty flexible, letting you at least try. Others look more closely at your recent income history and have to be pursuaded that your income is consistent enough to meet this hurdle. This is one of those areas where it pays to have a good attorney in your corner, one who has experience with your judge and the expertise to present your circumstances in the best light.