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Chapter 13 Bankruptcy Criteria

Chapter 13 Bankruptcy Criteria And Tests Used By The Bankruptcy Court

Chapter 13 Bankruptcy Criteria For Eligibility.

A debtor must satisfy all five of the following criteria in order to be eligible for Chapter 13 relief:

  • The debtor must be an individual, or the debtors must be husband and wife. Corporations, limited liability companies, partnerships, and business trusts are ineligible for Chapter 13 relief.
  • The debtor must be generating income, whether it be employment income, proceeds generated from operation of a business, rental income, government assistance, or assistance from friends or family.
  • The debtor must be generating more income each month than he or she is spending on going forward expenses so that something can be offered to creditors.
  • The debtor's secured obligations, such as home mortgages, mortgages on other real estate, obligations secured by personal property such as business debt, and automobile liens, etc., must total less than $1,081,500.00.
  • The debtor's liquidated unsecured obligations must total less than $360,525.00.

Chapter 13 Bankruptcy Plan Confirmation Criteria.

The debtor's plan must satisfy all five of the following tests in order to be confirmed by the Court:

  • The debtor's plan must be proposed in good faith. In most cases, good faith is not in question, but it might be if the debtor has filed multiple bankruptcy cases or a family member has filed one or more prior cases in order to stave off foreclosure of a parcel of property.
  • The debtor's plan must satisfy the "best interests of creditors/liquidation" test, i.e., the plan must propose to pay creditors at least as much as they would have received had the debtor in fact filed a Chapter 7 proceeding and administrable assets were liquidated by a bankruptcy trustee to pay the claims of creditors. For example, say the debtor owns a business as a sole proprietorship and the business has accounts receivable, inventory, and equipment, above and beyond all liens, leases, and available exemptions, worth $30,000. The debtor's Chapter 13 plan must propose to pay creditors at least $30,000 over its thirty-six to sixty month duration. A plan that fails to propose creditors at least much as they would have received had the debtor in fact filed a Chapter 7 proceeding will not be confirmed by the Court. Keep in mind, however, that how much creditors would have received in a Chapter 7 proceeding may be the subject of some dispute.
  • The debtor's plan must be feasible. The debtor is required to demonstrate that he or she is actually generating the income he or she claims in his bankruptcy schedules to be generating. The debtor is required to provide income tax returns, paystubs, proof of rental income, proof of government assistance, etc.
  • The debtor's plan must devote to creditors all net disposable income, as determined by the "means test," for a sixty month period. The Chapter 13 trustee will scrutinize closely the debtor's budget, in which the debtor has represented how much he or she is spending each month for rent or mortgage, utilities, food and groceries, insurance, medical, transportation, etc. If the debtor's budget includes expenses which appear to be unreasonably high, such as food and groceries of $1,200 per month for a family of three, or appear to be inappropriate, such as leasing a new Mercedes-Benz vehicle for $1,200 per month rather than a Toyota Tercel for $250 per month, the trustee will likely object and urge the bankruptcy judge to either dismiss the case, or confirm the plan only if the offending expense is reduced or removed from the budget.
  • The debtor's plan must provide specific treatment for specific creditors. If the debtor is behind on his or her mortgage and wishes to keep the property, the debtor's plan must fully amortize the mortgage arrearages. For example, if a debtor is $20,000 in arrears to his or her mortgage company, and his or her plan provides that only $12,000 will be paid to the mortgage company in partial cure of the arrearages, the plan cannot be confirmed by the bankruptcy judge. If the debtor is behind on recent and therefore priority tax obligations, the plan must fully amortize such tax obligations. For example, if a debtor is $20,000 in arrears to the Internal Revenue Service for recent priority nondischargeable taxes, and his or her plan provides that only $12,000 will be paid to the Service in partial cure of the tax obligations, the plan cannot be confirmed by the bankruptcy judge.

Of the above five tests, the one that results in the highest monthly payment to creditors is the one that dictates how much the debtor will have to pay.

For more information, or to discuss your situation with our experienced bankruptcy attorneys, contact the Law Offices Of Hagen & Hagen today to arrange your no charge in-person or by-phone initial consultation. We represent clients throughout Southern California, including Los Angeles County, Orange County, Riverside County, San Bernardino County, Santa Barbara County, Ventura County and San Luis Obispo County. We see clients from all over the greater Los Angeles area, including Santa Monica, Long Beach, Anaheim, Pasadena, Orange, Huntington Beach, Newport Beach, Garden Grove, Irvine, Yorba Linda, Riverside, San Bernardino, Pomona, Torrance, Simi Valley, Mission Viejo, Ontario, Glendora, and Covina. We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.