Bankruptcy is an option for individuals struggling with mountains of debt because it provides honest debtors with a clean slate. The clean slate, in legal terms, is a discharge. The bankruptcy process provides that a debtor can discharge his or her debt so that the debtor is no longer obligated to repay certain creditors. One such avenue to achieve the coveted discharge is through Chapter 13 bankruptcy. Known as the “wage earner’s plan,” Chapter 13 allows individuals with a regular income to attain a discharge, provided that the debtor completes a three- or five-year plan to repay the debt.

Chapter 13 Eligibility

The parameters of Chapter 13 bankruptcy are such that only an individual with regular income, or such an individual and his or her spouse, may file a Chapter 13 petition. To illustrate, a stockbroker or commodity broker may not file a Chapter 13 petition or join in the Chapter 13 petition of his or her spouse. The key point for Chapter 13 eligibility is whether the individual has “regular income.”

The Bankruptcy Code defines “regular income” as income that is “sufficiently stable and regular to enable such individual to make payments under a plan under Chapter 13. . . .” The affect is on the stability and regularity of income. People involved in high-stakes business deals would therefore have difficulty satisfying this crucial requirement of Chapter 13 bankruptcy.

The source of that stability and regularity is less of an issue. Courts found that contributions from third parties may satisfy the regular income requirement if the party making contributions has demonstrated a “willingness and ability to do so.” Some courts found that a debtor who has regular income on the petition date but loses that status later is eligible for Chapter 13. Nonetheless, the debtor bears the burden of proof in establishing ability to make plan payments and must provide sufficient evidence for the court to determine both the regularity and stability of the income.

Broadening Regular Income

The definition of an individual with regular income is far broader than the concept of a wage earner under the former Bankruptcy Act, and many courts have been liberal in construing this requirement. For example, some courts have defined regular income to include regular receipt of a range of welfare and pension benefits, the foreseeably consistent income of a self-employed individual, and even consistent contributions from relatives.

Unlike Chapters 7 and 11, Chapter 13 has certain debt limitations, which are set forth in section 109(e) of the Bankruptcy Code. Only an individual with regular income that owes on the date of the filing of the petition non-contingent, liquidated, and unsecured debts of less than $394,725 and non-contingent, liquidated, and secured debts of less than $1,184,200 is eligible to be a Chapter 13 debtor. If an individual and spouse file a joint Chapter 13 petition, the same limitations apply to their aggregate debts; that is, the debt ceiling is not doubled. Section 302 does not compel a husband and wife to file a joint petition, as spouses are entitled to file separate Chapter 13 cases if they so desire. The eligibility limits are strictly construed and based upon debts as of the petition date.

If you are a wage earner and facing severe debt problems, contact the law firm of Melanie Tavare, an experienced bankruptcy attorney.