Series: #6 0f 13
In our previous article, we took an overview of Chapter 7 bankruptcy, and how it is handled in Indiana, an “opt out” state where residents take exemptions found under state law. In this installment, we will discuss why a debtor may not be eligible to file for a Chapter 7. Future articles will look at other reasons to file a Chapter 13 rather than a Chapter 7 Bankruptcy.
What is Chapter 13 Bankruptcy?
As mentioned in the last post, Chapter 13 is commonly described as the “adjustment of debts of an individual with regular income” or a reorganization of one’s finances through a plan approved by the court. Three key components to a Chapter 13 plan are eligibility (whether a debtor is entitled to file a Chapter 13 under the limitations set forth in Section 109(e)), feasibility (whether a debtor can fund a payment plan which complies with Section 1322 and 1325), and good faith (as set forth in Section 1325 – Confirmation of plan*(a)(3)).
Per 11 U.S.C. Sec. 109*(e), there are limitations as to how much debt an individual having regular income can have to be eligible for Chapter 13.
Except for a stockbroker or a commodity broker, and individual and his spouse may have up to $336,900.00 of noncontingent, liquidated unsecured debt and non-contingent, liquidated, secured debts up to $1,010,650.00. [NOTE: These figures will adjust up to $360,475.00 and $1,081,400.00 respectively in April 2010.]
Why file a Chapter 13? You may not qualify for Chapter 7 Relief.
- The debtor is not eligible to receive a Chapter 7 discharge. As discussed briefly above, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 7 or 11 in a case commenced within eight years before the date of filing the petition.In addition, a debtor may not receive a discharge of debts under Chapter 7 of the Bankruptcy Code if the debtor has received a discharge in Chapter 12 or 13 in a case commenced within six years before the date of filing the petition. See 11 U.S.C. §§ 727 – Discharge*. Maybe the first question to ask the debtor is whether she has ever filed for bankruptcy before.The attorney should also review the Public Access to Court Electronic Records (PACER) for information on previous filing dates and whether the debtor received a discharge or whether the case was dismissed.
- Filing Chapter 7 would be abusive to Chapter 7 provisions. In a nutshell:
- If the debtor’s average “current monthly income” minus expenses reasonable and necessary (as defined by 11 USC § 707*(b)(2)(a)(i)-(iii)) leaves less than $6,575.00 ($109.00 per month), then there is no automatic presumption of abuse.
- If the resulting figure leaves more than $10,950.00 ($182.50 per month) then there is an automatic presumption of abuse. If the resulting figure is anywhere between the two numbers, then there is a presumption of abuse if that figure would pay at least 25% of the non-priority unsecured claims (if the debtor has more debt, then there is less likelihood of abuse!). Note that the figures increase every three years on April 1.
- The next adjustment is April 1, 2010. According to the Federal Register, Volume 75, Number 37 (February 25, 2010) the increased figures will be $7025.00 ($117.08 per month) for no abuse and $11,725 ($195.41 per month) for presumption of abuse.
[We are not going to try and explain the provisions of the Section 707(b) means test in the limited space of this article because a reasonable explanation would likely take pages. Entire seminars have been given on the means test requirements, and Section 707(b) is very likely the section that has created the most litigation across the country. For more information on the topic, read 11 USC § 707 – Dismissal of a case or conversion to a case under chapter 11 or 13*.]