Chapter 13 is a 3 to 5 year payment plan supervised by a bankruptcy trustee designed to reorganize relatively small debtors. Big companies or individuals with substantial debt seeking to establish reorganization plans (as opposed to filing a Chapter 7 liquidation bankruptcy) must file Chapter 11. The streamlined procedure of Chapter 13 is limited to individual debtors with smaller amounts of debt, and the cost of Chapter 13 is significantly less than Chapter 11.
Bankruptcy Code §109(e) provides the following eligibility guidelines.
- Individual Debtors only. No corporations may file Chapter 13.
- Unsecured, noncontigent, liquidated debts not to exceed $360,475.
- Secured debts not to exceed $1,081,400.
- The debtor must have regular income.
The debt limits are indexed to inflation and are updated every 3 years. (Bankruptcy Code §104(b)). The next scheduled change is set for April 1, 2013.
Student loan debts, especially for debtors with advanced degrees, when combined with credit card and medical debts can often disqualify an individual from Chapter 13 relief.
Debtors who have personally guaranteed business debts of their company may also find themselves disqualified from filing Chapter 13.
Debtors who have personally guaranteed business debts of their company may also find themselves disqualified from filing Chapter 13. However, pay special attention to the type of unsecured debt that is limited by §109(e). The unsecured debt must be noncontingent and liquidated as measured on the date the bankruptcy is filed.
Bankruptcy cases tend to distinguish personal guarantees that are “absolute” from guarantees that are merely “contingent.” For example, if a debtor owns a company with a $500,000 building or equipment loan that is personally guaranteed by the debtor, may that person file Chapter 13? Several factors need to be considered and a close examination of the loan guarantee must be performed. Does the bank have to liquidate the building or equipment before it may seek payment from the guarantor, or may the bank initiate collection upon a mere default of the company’s debt? Does the bank have to accelerate the loan before the guarantor is liable? There are several factors that must be reviewed to determine whether the amount of a personal guarantee will count against the debt limits of §109(e).