For the past three weeks, I’ve written about the requirements that are needed to file a chapter 7 bankruptcy case, and what is required to receive a chapter 7 discharge. Chapter 7 Bankruptcy is the most common chapter that consumer debtors use when they file a bankruptcy case. Chapter 7 is a relatively quick, cost-effective way to discharge debt for people who are being overwhelmed by their financial situation. Chapter 7 uses a “liquidation” approach to financial problems - a chapter 7 debtor does not repay her creditors in whole, or in part, and a chapter 7 trustee is appointed to liquidate any non-exempt property owned by the debtor.
But Chapter 7 Bankruptcy isn’t the only choice a person with significant consumer debt. Some people choose to file a chapter 13 bankruptcy case to resolve their financial situation. Unlike the liquidation character of chapter 7, a chapter 13 bankruptcy is a repayment plan. In a chapter 13 case, a debtor will propose to pay her disposable income (net income minus necessary and reasonable living expenses) to a chapter 13 trustee, over a three year to five year period of time. The chapter 13 trustee, in turn, will pay the debtor’s obligations according to a plan proposed by the debtor, which is confirmed by the bankruptcy court.
Chapter 13 Bankruptcy is a repayment, not liquidation, approach to overwhelming financial problems.
Individuals with financial problems that are not treated in chapter 7, such as mortgage arrears, or expensive car payments often see chapter 13 as the chapter of choice in bankruptcy. Also, people who have debt that is typically not discharged - such as back child support, or back taxes, will often file a chapter 13 case to propose a repayment plan for those obligations. Last, people with financial problems who nevertheless own significant assets will file a chapter 13 case in order to preserve their property, since a chapter 13 trustee (as opposed to a chapter 7 trustee) does not liquidate a debtor’s assets. So what are the requirements to file a chapter 13 bankruptcy in Minnesota?
Venue and Credit Counseling
The venue requirements in a chapter 13 case are the same as chapter 7 - residence in the state for the preceding six months, or the location of the debtor’s principal place of business, or the location of the debtor’s principal asset.
And just like chapter 7, the chapter 13 debtor must receive a credit counseling briefing within six months prior to the chapter 13 case being filed.
Debt Limits
Unlike chapter 7, a debtor cannot file a chapter 13 case unless the debtor’s unsecured and secured debt are less than the amounts set out by the bankruptcy code. The bankruptcy code says that in order to file a chapter 13 bankruptcy case, the debtor must have less than $394,725 in unsecured, noncontingent, liquidated debt.
The bankruptcy code also provides that in order to file a chapter 13 bankruptcy, the debtor must have less than $1,184,200 in secured, noncontingent, liquidated debt.
Noncontingent debt is debt that the debtor owes without having another event take place - contingent debt is debt an individual owes only if a third party, either a person or a company, defaults in payment of a debt the debtor co-signed for. Liquidated debt means that the debt is in a set amount - such as a credit account, mortgage or car loan. Unliquidated debt is debt in an amount that has not yet been formally determined - such as a claim for damages that has resulted in a lawsuit for which a judge or jury has not yet rendered a verdict.
The Means Test
Chapter 13 debtors have to file a document that sets out their annualized income, just like chapter 7 debtors. Unlike chapter 7, though, the chapter 13 debtor cannot be disqualified from filing a chapter 13 case if the chapter 13 debtor’s income is above the median income for a household the debtor’s size. The determination of median income is important for chapter 13 debtors, though: a chapter 13 debtor with above-median income must file a 60-month (five year) chapter 13 plan.
These are the requirements to file a chapter 13. But just like chapter 7, the point of a chapter 13 bankruptcy filing is to obtain a discharge of debt. So what’s needed for a discharge?
The Trustee’s Meeting
Just like chapter 7, the chapter 13 debtor must appear and meet with a chapter 13 trustee after the chapter 13 case has been filed and before the chapter 13 plan is confirmed by the bankruptcy court.
Payments
In order to receive a discharge, the chapter 13 debtor must make monthly payments to the trustee according to the confirmed chapter 13 plan.
Child Support and Taxes
A chapter 13 debtor must maintain current status on domestic support obligations - child support and spousal maintenance payments - though the time the chapter 13 case is open in order to receive a discharge.
The chapter 13 debtor has to file all state and federal income tax returns that become due during the time the chapter 13 case is open.
Chapter 13 also requires that every year a debtor is in a chapter 13 case, the debtor has to send to the trustee a correct copy of all state and federal tax returns that the debtor files.
The requirement that a chapter 13 debtor send the trustee tax returns during the chapter 13 case is done for two reasons: to allow the chapter 13 trustee to monitor the financial condition of the debtor and (perhaps) require the debtor to pay to the trustee “surplus” tax refunds. In Minnesota, chapter 13 debtors are entitled to retain the first $1200 of the combined tax refunds (if the debtor has filed a single bankruptcy and files a single return), or the first $2000 of the combined tax refunds (if the debtors have filed a joint bankruptcy case or if the debtor files a joint return with a non-bankruptcy debtor spouse).
If the bankruptcy trustee sees that the debtor’s income has increased significantly since the time the chapter 13 case was filed, the trustee can ask the debtor to update his income and expense schedule, which can result in a modified chapter 13 plan payment.
Before receiving a discharge, the chapter 13 debtor must certify that he is current on any domestic support obligations and that he’s filed his taxes every year he’s been in a chapter 13 case.
Financial Management Course
Just like chapter 7, the chapter 13 debtor must complete a financial management course in order to receive a discharge.
So those are the requirements for filing a chapter 13 case, and the requirements to receive a chapter 13 discharge - for the most part, very similar to a chapter 7 case, but with some notable differences.
