Who Can File A Chapter 13 Bankruptcy?

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Chapter 13 has a few restrictions:

1. Only an individual or a legally married couple can file a Chapter 13. Businesses are not eligible to do a Chapter 13 bankruptcy case.
2. A debtor is ineligible for Chapter 13 protection if the debtor exceeds either of two debt ceilings. One ceiling is for noncontingent, liquidated, unsecured debt (currently $419,275); the other ceiling is for noncontingent, liquidated, secured debt (currently $1,257,850).
3. The debtor is ineligible for a discharge if the debtor received a discharge either in a prior Chapter 7, 11, or 12 that was filed less than four years before filing the current case, or in a prior Chapter 13 that was filed less than two years before filing the current case.

To understand the second limitation it helps to have a little vocabulary:

1. The Debt Ceilings

A. Contingent Debt

A contingent debt is a debt that’s contingent upon some event taking place. If the event doesn’t occur, then no payout is required.

For example, suppose you have commercial property worth $2,000,000. You buy an insurance policy that has a $1,000,000 cap on the coverage; meaning that it will pay up to $1,000,000 on a claim for damage to the property.  Since the property is worth $2,000,000 you need additional insurance in case a fire destroys the entire property. Therefore, you buy a supplemental insurance policy that pays out only if the damage exceeds $1,000,000. Thus, any payout is contingent on the exhausting of the first policy, so any claim on the policy is a contingent claim.

B. Liquidated Debt

A liquidated debt is one where the amount of the debt has been established, perhaps in a court of law.

For example, suppose someone sues you for $1,000,000. Do you owe the plaintiff $1,000,000? Not until the plaintiff has received a judgment for $1,000,000. After all, the plaintiff may lose the case. And even if the plaintiff wins, the court may award considerably less than the requested amount. Until there is a sum certain for the claim, it is unliquidated.

C. Secured Versus Unsecured Debt

A secured debt is one that is secured by collateral that can be repossessed by the creditor in the event of a default. Simple examples include car loans and home mortgages. If you fail to make the car payments, the creditor can repossess the car; and if you fail to make the mortgage payments, the creditor can foreclose on the property.

2. Limitations On Receiving A Discharge

If you have ever heard of a Chapter 20 case, the third limitation may puzzle you. Wait a minute! The Bankruptcy Code doesn’t have a Chapter 20. What does this mean?

Suppose a debtor has too much unsecured debt to qualify for Chapter 13 relief, but can qualify for Chapter 7 protection. The debtor can do the Chapter 7 to get rid of the dischargeable unsecured debt, and afterwards do a Chapter 13 to deal with those debts that were not discharged in the Chapter 7. Since 7 + 13 = 20, this combination is referred to colloquially as a Chapter 20.

However, if the Chapter 7 case was too recent, the debtor is ineligible for a Chapter 13 discharge. Why would the debtor file a Chapter 13 without a hope of receiving a discharge? Here are a couple of fact patterns under which it makes sense to do a Chapter 13, even if there is no discharge at the end of the plan:

A. Dealing With Nondischargeable Tax Debt

If the debtor has tax debt that was not discharged in the Chapter 7, that debt can be paid over five years through the plan. And if the tax debt is unsecured, it is not entitled to interest. Thus, the Chapter 13 can make paying the tax debt manageable.

B. Curing A Mortgage Arrearage

Suppose the debtor fell behind on the mortgage payments after filing the Chapter 7, but less than four years later. As long as the debtor has enough income, the mortgage arrearage can be cured over a five-year Chapter 13 plan. Since the whole point of the plan is to catch up on the mortgage to prevent a foreclosure sale, it doesn’t matter whether there’s a discharge waiting at the end of the plan.

In sum, only be an individual or a legally married couple, whose debts don’t exceed the debt ceilings, can file for Chapter 13.

For more information on Chapter 13 Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.