Chapter 13 bankruptcy is commonly called a wage earner plan. In contrast to Chapter 7, it focuses on paying creditors from the debtor's earnings rather than by selling property. The debtor submits a detailed budget setting forth wages, taxes, and ordinary living expenses. The excess of income over expense (“disposable income”) is paid to the Chapter 13 bankruptcy trustee each month, who in turn pays creditors.
Chapter 13 is limited to individuals with regular monthly income. Usually this means the debtor has a steady job and is paid salary or wages on a regular basis.
There are also limits on the amount of debt. Effective April 1, 2022, the limits are no more than $465,275 of unsecured debt and no more than $1,395,875 of secured debt.
Chapter 13 is particularly useful when the debtor has secured loans, intends to keep the property, and just needs time to get caught up on payments. For example, someone who had to skip payments for six months because they were unable to work (unemployed or health issues) but now has a good job.
An individual operating a small business that is a sole proprietorship can use Chapter 13 if the business generates regular income. A small business is a sole proprietorship if it is not incorporated, is not a limited liability company, and is not a partnership (other than an informal partnership between a husband and wife). In this case, the debtor/sole proprietor is personally liable for all of the business debts.
Once payments under a Chapter 13 plan are completed, most debts are discharged except for domestic support obligations; most student loans; certain taxes; most criminal fines and restitution obligations; certain debts for acts that caused death or personal injury; and certain long term secured obligations.
With few exceptions, individuals must complete credit counseling before filing any form of bankruptcy. Individuals must complete a personal financial management course with an approved provider after filing bankruptcy but before the bankruptcy discharge is scheduled to issue.
MEANS TESTING
Individuals whose debts are primarily consumer debts are subject to a “means test” designed to determine whether they can proceed under Chapter 7 or whether they must proceed under Chapter 13. The means test calculations are also relevant to monthly "disposable income," which determines how much you must pay the Chapter 13 trustee every month and whether payments can last for less than five years.
The means test has two parts. The first part compares your income to the median income for your state of residence and family size. If income is below median, the means test is satisfied and Chapter 7 is possible. If income is above median, the second part of the test factors in expenses. Chapter 7 is still possible if your qualifying expenses are high compared to your income. The means test, your income, and your qualifying expenses are some of the very first things that the attorney will discuss with you.
Median income figures are adjusted at least once a year, most recently effective November 1, 2023. In California, monthly median pre-tax income ranges from $5,988 for one person to $10,287 for a family of four.
CREDIT COUNSELING
With few exceptions, individuals must complete credit counseling before filing any form of bankruptcy.
DEBTOR EDUCATION
Individuals must complete a personal financial management course with an approved provider after filing bankruptcy but before the bankruptcy discharge is scheduled to issue.
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