Who May Be a Debtor in Chapter 13 Bankruptcy

In Chapter 13, few clients (usually real estate investors) are aware of certain sections of the Bankruptcy Code which prevent them from filing a Chapter 13, a less expensive (in terms of attorneys fees) and less burdensome alternative than a Chapter 11 filing.  Read more about our attorneys fee and costs for Chapter 13 Bankruptcy. The upshot is that in Chapter 13, the Chapter 13 repayment plan is approved without a vote of creditors. In Chapter 11, the creditors must vote to approve the plan.  Therefore, clients find it more advantageous to file for Chapter 13 than Chapter 11 if the Bankruptcy Code permits.

Section 109(e) of the Bankruptcy Code states that a debtor may not file for Chapter 13 if the debtor does not have regular income from some source.  A debtor may qualify if he or she is receiving unemployment benefits, for instance.  Section 109 also prevents a filing if the debtor has more than $336,900 in liquidated unsecured debts and $1,010,650 in combined, liquidated secured debts.  The figures are revised every 3 years.

A real estate investor, who is delinquent on mortgage payments, will have more than $1,010,650 in mortgages preventing the Chapter 13 filing.  This will result with just one investment property in addition to the debtor's residence.  In addition, if real estate is underwater, the unsecured portion of the mortgage will be counted toward the $336,900 limit in Chapter 13.(See the Scovis case for further explanation).

Section 109 of the code also prevents anything other than an "individual" from filing a Chapter 13.  A corporation is not considered an individual under the Bankruptcy Code and therefore, may not file for Chapter 13.  The corporation (small business or otherwise) must file for either Chapter 7 or Chapter 11.