Who Qualifies for Chapter 13 Bankruptcy? Income Limits Explained

Filing for bankruptcy can be a confusing process. With different chapters and eligibility requirements, it’s hard to know if you actually qualify or not. One of the most common types of bankruptcy filings is Chapter 13. But not everyone can file Chapter 13 – you have to meet certain income limits and other qualifications.

In this article, we’ll break down exactly who can and can’t file for Chapter 13 bankruptcy. We’ll look at income limits, debt limits, and other eligibility factors. We’ll also explain how the income limits work and what types of income count. Let’s dive in!

What is Chapter 13 Bankruptcy?

First, a quick overview of what Chapter 13 bankruptcy actually is. Chapter 13 is sometimes called a “wage earner’s plan” because it’s designed for individuals with a regular income. The goal of Chapter 13 is to reorganize your debts and catch up on any missed or defaulted payments through a 3-5 year repayment plan approved by the bankruptcy court.

With Chapter 13, you get to keep your property like your house or car while you repay your debts over time. This makes it different than Chapter 7 bankruptcy where some of your assets may be liquidated to pay back debts.

Chapter 13 Eligibility Requirements

There are a few main criteria you must meet to qualify for Chapter 13 bankruptcy:

• You must be an individual – businesses like LLCs or corporations can’t file Chapter 13
• You must have regular income – this includes wages, self-employment income, social security, pensions, etc.
• Your secured debts can’t exceed $1,257,850
• Your unsecured debts can’t exceed $419,275
• You must have filed taxes in the past 4 years
• You can’t have discharged debts in certain other bankruptcies within the past 2-4 years

Let’s look at each of these requirements more closely.

You Must Be an Individual

Chapter 13 bankruptcy is only for individuals – meaning human beings, not businesses. Sole proprietors can file Chapter 13, but partnerships, LLCs, corporations, and other business entities can’t. Chapter 13 is intended for consumer debt, not business debt.

You Must Have Regular Income

To qualify for Chapter 13, you have to have regular income. This includes income from:

• A job (wages, salary, commissions, tips)
• Self-employment
• Social security benefits
• Pensions
• Child support or alimony
• Investment income
• Any other regular source

The key is having stable income that you can rely on to make the monthly payments under your Chapter 13 repayment plan. The court will review your income sources to make sure they are consistent.

Your Secured Debts Can’t Exceed $1,257,850

“Secured debt” refers to any debt that is tied to collateral, like a mortgage on your home or a car loan. To qualify for Chapter 13, your total secured debts cannot be more than $1,257,850. This limit adjusts periodically for inflation.

If the sum of all your debts tied to property exceeds the limit, you may not qualify for Chapter 13. You may need to consider Chapter 7 or other options instead.

Your Unsecured Debts Can’t Exceed $419,275

“Unsecured debt” is any debt that doesn’t have collateral tied to it. This includes credit cards, medical bills, personal loans, utility bills, etc. To qualify for Chapter 13, your total unsecured debts cannot be more than $419,275. This amount also adjusts for inflation over time.

If your total unsecured debts are too high, Chapter 13 may not be an option. The court wants to see that you can feasibly repay your debts through the 3-5 year Chapter 13 plan.

You Must Have Filed Taxes in the Past 4 Years

To qualify for Chapter 13, you must have filed an income tax return in the past 4 years. If you failed to file returns, you may need to prepare and file them before your bankruptcy case can proceed. This shows the court you have steady income to make plan payments.

No Prior Bankruptcy Discharges in Past Years

If you previously filed Chapter 7, 11, 12, or 13 bankruptcy and had debts discharged, you must wait before filing again. There is a 4-year waiting period after a Chapter 7, 11, or 12 discharge. And there is a 2-year waiting period after a Chapter 13 discharge. This prevents abuse of the system.

Chapter 13 Income Limits

In addition to the eligibility requirements above, Chapter 13 has income limits you must fall under to qualify. These income limits look at your current monthly income and household size.

Calculating Current Monthly Income

Your current monthly income (CMI) includes the average monthly income you received over the past 6 months. Income from all family members in the household is included. The court looks at income from these sources:

• Job wages (gross income before taxes/deductions)
• Self-employment income
• Social security benefits
• Pensions, annuities, insurance policies
• Dividends, interest, rental income
• Alimony, child support
• Unemployment compensation
• Any other source

Your CMI is calculated by adding up your total income from all sources over the past 6 months, and dividing by 6. This gives a monthly average income amount.

Median Income Based on Household Size

Once your CMI is calculated, it gets compared to the median income for your state and household size. There are median income tables listing income caps based on family size.

For example, the median annual income for a family of 4 in California is currently $106,430. So your CMI would have to fall under this amount to qualify for Chapter 13 based on income.

If your income exceeds the median, you may still qualify if you can show there are special circumstances necessitating bankruptcy relief.

Does Income Type Matter for Chapter 13?

When it comes to the income limits, the type or source of income typically does not matter for Chapter 13 eligibility. As long as the income is regular and stable, it counts toward the CMI calculation. Even illegal income must be disclosed, though this can raise other issues.

However, income received as a one-time payment, like an inheritance or insurance settlement, does not count as CMI. The court only looks at recurring monthly income. So one-time payments don’t impact Chapter 13 eligibility.

What If Your Income Changes?

For Chapter 13, your income is evaluated at the time you file. But what happens if your income changes during the 3-5 year repayment plan? This can definitely happen, especially if you lose a job or get a new one.

The good news is you can ask the court to modify your Chapter 13 plan if your income substantially increases or decreases. The payments can be adjusted up or down to account for income fluctuations. So your eligibility is based on your income when filing.

Other Common Chapter 13 Eligibility Questions

Here are a few other common eligibility questions that come up with Chapter 13 bankruptcy:

Can the Self-Employed File Chapter 13?

Yes! Self-employed individuals are definitely eligible for Chapter 13 assuming they meet the income requirements. Your income from self-employment would simply be included in calculating your CMI.

Can Retirees File Chapter 13?

Retirees can absolutely file Chapter 13 as well. Social security income and pension payments both count as regular income for eligibility purposes. There is no age limit to file Chapter 13.

Do Child Support/Alimony Count as Income?

Yes, any child support or alimony received would be included in your CMI calculation for Chapter 13. These types of recurring payments count as regular income.

Can I File Chapter 13 If I Own a Business?

You can file Chapter 13 as an individual business owner or sole proprietor. However, the business itself cannot file, and business debts would not be discharged. Only your personal consumer debts are affected.

The Bottom Line

Filing Chapter 13 bankruptcy involves meeting income eligibility requirements, debt limits, and other qualifications. While not everyone qualifies, Chapter 13 can provide debt relief if your income is regular and stable. The key is falling under median income limits based on your household size.

Every situation is different, so talking to a bankruptcy attorney is the best way to assess whether you qualify for Chapter 13 based on your unique circumstances. They can help you analyze your income, debts, and options. With professional guidance, you can determine if Chapter 13 is your best path forward.

Hopefully this gives you a better understanding of Chapter 13 eligibility! Let me know if you have any other questions.

[1] https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics
[2] https://www.nolo.com/legal-encyclopedia/chapter-13-bankruptcy-eligibility-29738.html
[3] https://www.findlaw.com/bankruptcy/chapter-13/who-can-file-for-chapter-13-bankruptcy.html
[4] https://www.lendingtree.com/bankruptcy/chapter-13/
[5] https://www.nerdwallet.com/article/finance/chapter-13-bankruptcy
[6] https://www.debt.org/bankruptcy/chapter-13/