Can Anyone Not Qualify for a Chapter 13 Bankruptcy

You would think with all the pressure for debtors to the file the “good” bankruptcy, i.e. Chapter 13 personal bankruptcy, that there wouldn’t and couldn’t be any way that a debtor could be disqualified, but it is possible and for the most surprising reasons.

1.  A Chapter 13 Debtor needs a “working” income to be confirmed.  In general, a debtor must be making an income from work and not from unemployment compensation and/or disability income.  There are exceptions to this rule, but for most purposes, including the modification of a car loan or keeping a home, the working income is a must.

2.  You can have too much debt.  For simple purposes, a Debtor cannot have more than $340,000 of unsecured (credit card style debt) and no more than approximately $1,000,000 of secured debt.  So what does this mean?

Example:  Charlie Sheen owns four homes.  Each is worth $500,000 and has a $600,000 mortgage.  Mr. Sheen makes $200,000 per year in income.  He decides to surrender three homes and keep the fourth.  Well, here’s how it goes.  He has $1,500,000 in secured debt that is now unsecured because the home are surrendered.  So how about keeping the homes?  We he could keep two homes or $1,000,000 of secured debt but then he has to get rid of $1,000,000 of unsecured debt.  Bottom line: he has too much debt and really too much income to use Chapter 13.

3.  You don’t make enough money.  Just because Chapter 13 is call the “good” bankruptcy doesn’t mean it’s good for everybody.  Instead, let’s just say that Chapter 13 works extremely well for debtors with income between $50,000 and $175,000, depending on debt load.

So what are the alternatives?

1.  A Chapter 11 Bankruptcy where over 50% of the debts are personal.
2.  A Chapter 7 Liquidation Bankruptcy, claiming that over 50% of the debts are business related (investment properties).  This is a nifty way to get a high-income Debtor into a Chapter 7 even thought they have a high income.  From a moral standpoint, the legislature has decided that the bankruptcy discharge has “less costs” to a business debtor and doesn’t force the “moralistic” repayment programs down the Debtor’s throat.

Conclusion:  To make a Chapter 13 work, you need a working employment income that is above $45,000 and less than $200,000 with unsecured debts less than $340,000 and secured debt under $1,000,000.   For a high-income Debtor with primarily business debt and no properties worth saving, the Chapter 7 Liquidation is best.  And lastly, for the high-income Debtor who needs a personal reorganization similar to Chapter 13, a Chapter 11 becomes relevant and cost-effective.

For more information and in the Chicagoland Area to set up a bankruptcy consultation, please call 877-GO-GO-NLO or email

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