Eligibility Issues in Chapter 13

For a debtor to be eligible to commence a Chapter 13 case, certain statutory requirements must be adhered to.  Section 109 of the Bankruptcy Code provides these requirements, which are as follows:

  • The debtor must be an individual,
  • The debtor must have income which is regular and stable,
  • The debtor must satisfy the debt limitations of §109(e), and
  • Section 109(g) must not apply to the debtor’s case
  1. The Debtor must be an individual

Only “individuals” have access to Chapter 13 as a means of financial rehabilitation.  11 U.S.C. §109(e).  Eligibility for other chapters of bankruptcy is not as limited; for example, “a person” may be a debtor under Chapter 7, and a person is defined by the Code to include “an individual, partnership, and corporation.”  See 11 U.S.C. §§109(b) and 101(41); see also Keith M. Lundin, Chapter 13 Bankruptcy, 3d Ed., §7.1 (2000 & Supp. 2002).   Partnerships and corporations, even closely held corporations by a single shareholder, are not eligible to file Chapter 13.  Vocque v. IRS, 60 B.R. 84 (Bankr. W.D. La. 1986).

An important exception to the general rule that only an individual is eligible for Chapter 13 relief is that an individual and his or her “spouse” may be eligible to jointly file a Chapter 13 petition.  11 U.S.C. §109(e).  The term “spouse” is not defined by the Bankruptcy Code; however, the usual meaning of the term would operate to exclude any non-marital relationships.  At the writing of this manuscript, only one bankruptcy court has reported a decision addressing the issue of same-sex couples filing a joint petition.  See In re Allen, 186 B.R. 769 (Bankr. N.D. Ga. 1995).  The bankruptcy court concluded that a same-sex couple is not entitled to file a joint Chapter 13 petition because the term “spouse” means “legally married”, and the State of Georgia does not recognize same-sex marriages.  In re Allen at 773.

  1. The Debtor must have regular and stable income

The definition of regular income appears in 11 U.S.C. §101(30) as “income that is sufficiently stable and regular…to make payments under a plan.”  The Bankruptcy Code does not define what constitutes “income”.  However, it is clear from the case law that “income” is defined in exceptionally broad terms for purposes of debtor eligibility.  See In re Baird, 228 B.R. 324 (Bankr. M.D. Fla. 1999); In re Goodrich, 257 B.R. 101 (Bankr. M.D. Fla. 2000); In re Kelly, 217 B.R. 273 (Bankr. D. Neb. 1997); In re Widdicombe, 269 B.R. 803 (Bankr. W.D. Ark. 2001); In re Vega, 163 B.R. 489 (Bankr. W.D. Tex. 1994); In re Cornelius; 195 B.R. 831 (Bankr. N.D.N.Y. 1995).

At the very least, the concept of regular and stable income should include wages or earnings received after commencement of the case.  The test for eligibility appears to require income that is predictable and consistent, although some courts have allowed salespersons operating on commission and other irregular-paying occupations to remain in Chapter 13 notwithstanding an eligibility attack.  Widdicombe, 269 B.R. at 808.  Some courts have recognized that benefits from a pension plan can be considered regular income sufficient to render the debtor eligible for Chapter 13.  In re Wood, 23 B.R. 552 (Bankr. E.D. Tenn. 1982).  This is so despite the fact that §541(c)(2) of the Bankruptcy Code excludes many types of pension plans from the definition of property of the bankruptcy estate.  Patterson v. Shumate, 504 U.S. 753, 112 S.Ct. 224 (1992)(ERISA-qualified plan is not property of the bankruptcy estate).

The definition of regular income includes many sources that a person might not ordinarily expect.  For example, it has been held that disability benefits and AFDC benefits constitute regular income sufficient to meet the eligibility requirements.  In re Allen, 241 B.R. 710 (Bankr. D. Mont. 1999); In re Hammonds, 729 F.2d 1391 (11th Cir. 1984).  Alimony and child support can also constitute regular income for eligibility purposes.  In re Taylor, 15 B.R. 596 (Bankr. D. Ariz. 1981).  One court found that social security income received by the debtor on behalf of her minor daughter constituted regular income to fund a Chapter 13 plan.  In re Cornelius, 195 B.R. 831, 835 (Bankr. N.D.N.Y. 1995).  However, courts are generally reluctant to find regular income when the debtor’s only sources of income are contributions from family members or friends.  In re Smith, 234 B.R. 852 (Bankr. M.D. Ga. 1999).  It has been held that the income of a live-in partner does not constitute regular income for eligibility purposes because the live-in partner has no legal duty to support or contribute to the household or the expenses of the debtor.  In re Gress, 257 B.R. 563, 568-69 (Bankr. D. Mont. 2000).

  1. The Debtor must satisfy the debt limitations of §109(e)

It is possible for a debtor to have so much debt that Chapter 13 relief is not available.  In cases filed between April 1, 2022 and March 31, 2025, a debtor must have noncontingent, liquidated, total debts of less than $2,750,000.00 to be eligible for Chapter 13 relief.  11 U.S.C. §109(e).  This figure includes both secured and unsecured debts.  These dollar amounts are subject to change on April 1 every three years to reflect changes in the Consumer Price Index during the previous three-year period.  11 U.S.C. §104(b)(1).  It should be noted that the dollar amounts do not change in cases where spouses file jointly.  See 11 U.S.C. §109(e).

While the dollar amounts for eligibility are clear and concise, there has been much litigation in bankruptcy courts over the definition of “noncontingent” and “liquidated” debts for the purpose of determining eligibility  There are some general rules developed through the case law.  Most courts hold that the debt limitations should be measured at the date the Chapter 13 petition is filed.  See In re Scovis, 249 F.3d 975 (9th Cir. 2001); In re Pearson, 773 F.2d 751 (6th Cir. 1985).  Likewise, it appears proper to use the statements and schedules filed with the petition to measure the amount of debt so long as those schedules are filed accurately and in good faith.  Scovis at 982; In re Tabor, 232 B.R. 85, 91 (Bankr. N.D. Ohio 1999).

  1. Section 109(g) must not apply to the Debtor’s case

Even in situations where the debtor meets the debt limitations and is “an individual with regular income”, the debtor may still be ineligible for Chapter 13 relief by operation of §109(g) of the Bankruptcy Code.  Section 109(g) renders an individual debtor ineligible for Chapter 13 within 180 days of the dismissal of a prior bankruptcy case if the prior case was (1) dismissed for “willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case,” or (2) voluntarily dismissed by the debtor “following the filing of a request for relief from the automatic stay.” 11 U.S.C. §109(g).  Courts have held that bankruptcy papers filed by a debtor who is ineligible due to §109(g) do not even constitute a “petition” and, thus, does not give rise to the automatic stay.  In re Rowe, 220 B.R. 591 (E.D. Tex. 1997); aff’d without pub. op., 178 F.3d 1290 (5th Cir. 1999).

There are several strategic considerations for the creditor in dealing with a debtor made ineligible by §109(g).  The most obvious is to file a motion to dismiss the case due to ineligibility.  This should be done prior to confirmation of the debtor’s plan, for it has been held by some courts that confirmation of the debtor’s plan is preclusive of an eligibility challenge under §109(g).  In re Estrella, 257 B.R. 114 (Bankr. D.P.R. 2000).  It is probably not a good idea for a creditor to challenge eligibility of a debtor whose last case was dismissed simply for nonpayment to the Trustee, unless the case was dismissed with prejudice.  Most courts agree that “willful failure to abide by the orders of the court” is defined as something more than nonpayment resulting from events outside the debtor’s control.  See In re Pike, 258 B.R. 876 (Bankr. S.D. Ohio, 2001); In re Faulkner, 187 B.R. 1019 (Bankr. S.D. Ga. 1995).  Creditors may be tempted to proceed with collection efforts or foreclosure and entirely disregard the filing of an ineligible debtor on the defensible argument that the filing of an ineligible debtor does not trigger the automatic stay.  Such a bold maneuver is likely to prompt a motion for sanctions by the debtor for violation of the automatic stay, forcing the creditor on the defensive.  A better approach is the filing by the creditor in the first instance of a motion to annul the stay or dismiss the case due to §109(g).  Keith M. Lundin, Chapter 13 Bankruptcy, 3d Ed., §21.11 (2000 & Supp. 2002).