What Is The Unsecured Debt Limit For Chapter 13?
In Chapter 7 bankruptcy, there is a limit to how much money you can earn. A chapter 13 bankruptcy, which is only available to individuals and married couples, places a cap on how much you owe. This amount is adjusted every few years. The most recent adjustment was April of 2019. Below, we’ll discuss debt limits, how they work, and what you can do if you owe more than the Chapter 13 debt limits allow.
As of April 1, 2019, Chapter 13 debt limits are:
• $1,257,850 in secured debts; and,
• $419,275 in unsecured debts.
For those who don’t know, secured debts are those that are secured against some form of collateral. For instance, a mortgage is a secured debt because the loan is backed by the home itself. Car loans are also secured debts. Unsecured debts are usually credit card debt, medical debt, or personal loans.
Chapter 13 Bankruptcy Basics
Chapter 13 allows a debtor to reorganize their debts into a lump-sum monthly payment that is executed over the course of three or five years. Those who owe a lot of money in secured debt tend to choose Chapter 13 over Chapter 7 because it allows them to retain possession of their home or car. To save your home or car, however, not only would a debtor need to be able to repay the arrearages, they would have to continue to make payments on the car loan. In some cases, they may also qualify for a cram down which allows them to reduce the overall cost of the debt to the current value of the car. You can also qualify to have some (if not all) of your unsecured debt discharged at the end of your bankruptcy. The problem that some debtors face with Chapter 13, is that the debt limits aren’t high enough, especially in places like Manhattan or California where housing costs are extremely high. This leaves debtors in a bit of a quandary as to how to proceed.
What Happens if I Exceed the Debt Limits?
If you happen to exceed the Chapter 13 debt caps, there are two options available to you. Those are:
• Chapter 11 bankruptcy and
• Chapter 20 bankruptcy.
Chapter 11 Bankruptcy
Generally, only businesses file under Chapter 11. However, individuals can too. The process is similar to Chapter 13, but it does not have a fixed end date. Chapter 11 bankruptcies are executed over the course of an undetermined amount of time. Chapter 11 bankruptcies are typically much more costly and cumbersome than Chapter 13 or Chapter 7 bankruptcies making them rarely the top choice of individuals. Nonetheless, it is an option for those who are dealing with millions of dollars in secured or unsecured debt.
Chapter 20 Bankruptcy
Chapter 20 is not an actual chapter of bankruptcy but is so named because the debtor first files under Chapter 7 and immediately follows up with a Chapter 13. They do this so they can discharge enough of their debt to get themselves under the cap. However, Chapter 7 only discharges unsecured debt, so the debtor must have gone over the unsecured debt cap while simultaneously being under the secured debt cap.
Exceptions to Chapter 13 Debt Limits
There aren’t really any exceptions to the Chapter 13 debt limits, but only specific debts qualify to be included in those debt limits. These include:
• Contingent debts – Contingent debts are those that are only triggered upon some contingency. As an example, a personally guaranteed business loan would remain in good standing until the business defaults. If the business doesn’t default, then it wouldn’t be counted toward the Chapter 13 debt limit.
• Non-liquidated debts – Non-liquidated debts are those in which the amount you owe is either uncertain or your liability is uncertain. These could include personal injury lawsuits that are pending.
Debt Limits for Chapter 13 Bankruptcies
If your debts exceed the allowed amounts, you can’t file for Chapter 13 bankruptcy. Chapter 13 bankruptcy is a powerful tool for people with regular income who can pay back some of their debts. Chapter 13 allows you to reorganize your debts so that you pay back some in full and some in part, all the while receiving protection from the bankruptcy court.
But you can’t qualify for Chapter 13 bankruptcy if your debts are too high. Read on to learn about debt limits for Chapter 13 bankruptcy.
Limits on Unsecured Debt
Unsecured debt is one that doesn’t have some property or asset serving as collateral for the payment of the debt. Most debts are unsecured. Common examples include credit card debt, medical bills, utility bills, lawyer’s fees, and rent. Chapter 13 is only available for people who have less than $419,275 in unsecured debts. Most debtors have less than $419,275 in unsecured debts. The exception is people with substantial medical bills.
Limits on Secured Debt
A secured debt is one that has property as collateral. If the debtor defaults or doesn’t pay on the loan, the lender can take the property. For most people, the two most familiar types of secured debt are mortgages on real estate and car loans. A secured lender who’s not paid could foreclose on a house or other real estate, or repossess a vehicle. In order to qualify for Chapter 13 bankruptcy, you must have less than $1,257,850 in secured debt (as of April 2019; the amount for cases filed before that date is $1,184,200). While that might seem like a lot, a person, family, or a sole proprietor of a business owning more than one piece of property could easily have mortgages exceeding that threshold. For instance, in certain expensive real estate markets, a single middle-class family home could have a mortgage that size. It’s more likely that a Chapter 13 debtor will have a problem with the secured debt limit than the limit on unsecured debt.
Strategies to Meet the Chapter 13 Bankruptcy Debt Limits
If it looks like your debts exceed the Chapter 13 debt limits, you still might be able to file for Chapter 13. You are not eligible to file for Chapter 13 bankruptcy if your debts exceed a certain amount. That is, if you have too much debt, you can’t use Chapter 13. But, if upon first glance, it appears that your debts exceed the limit, take a closer look. You may be able to exclude certain debts from the calculation or use other strategies that will bring your debts below the limits.
What Are the Chapter 13 Debt Limits?
You are not eligible to file for Chapter 13 bankruptcy if the total of your non-contingent, liquidated debts exceed the limits set by the bankruptcy law. The limit amounts change every three years. As of April 1, 2019, if your secured debts (mortgages and liens) add up to more than $1,257,850 or your unsecured debts add up to more than $419,275, Chapter 13 may not be available to you. If it seems like your debts are too high, you might still qualify for Chapter 13. Here’s why:
• Your debts might not be below the limits.
• You might be able to use strategies to get your debts below Chapter 13 limits.
Review and Categorize Your Debts
Take the time to carefully review and categorize your debts. You may find that:
• some of your debts do not count toward the debt limits, or
• you may be able to divide certain secured debts into secured and unsecured portions — thus increasing your unsecured debt and decreasing your secured debt.
Determine Which Debts Don’t Count Towards the Debt Limit
You must list contingent and un-liquidated debts in your bankruptcy papers but they do not count toward the debt limits.
Contingent debts: These are debts that you have no obligation to pay unless a specific event, called a contingency, occurs. Most often, these are personal guarantees that you don’t have to pay unless someone else, often a business, defaults. If the contingency event hasn’t happened, the debt does not count toward the debt limits. You might think that co-signed debts are contingent (for example, you agree to co-sign on your brother’s car loan with the understanding that he’ll pay the debt), but that’s usually not the case. Even if you have an agreement with the other person that you will not have to repay the debt, legally you are equally responsible.
Un-liquidated debts: These are debts where your responsibility to pay has not been determined, or where the amount cannot be readily determined. This category often includes accident and other personal injury claims. Breach of contract claims, where the contract is for the payment of money and the amount can be easily calculated, may not qualify as un-liquidated.
Divide Debts into Secured and Unsecured Portions
With lien stripping and cram down you remove a lien, or part of a lien, from secured property in bankruptcy. The portion of the removed lien is converted to unsecured debt. In this way, you increase your unsecured debt amount, but decrease your secured debt amount. This might help you stay under the debt limits.
If You Still Don’t Qualify, Consider Chapter 20 Bankruptcy
Chapter 20 bankruptcy is a two-step strategy to deal with your debts in the bankruptcy court. It can help if you really need a Chapter 13 (for example, perhaps you want to keep your home or car and need Chapter 13 to catch up on back payments, or maybe you have debts that will be wiped out in Chapter 13, but not Chapter 7) but your debts are too high to qualify.
Here’s how Chapter 20 bankruptcy works:
First, you file for Chapter 7 bankruptcy (this assumes, of course, that you can pass the Chapter 7 means test and meet other eligibility criteria for Chapter 7). In Chapter 7, you wipe out unsecured debts (assuming they are eligible for discharge). Reducing your unsecured debt load may then allow you to meet the Chapter 13 debt limits. If so, you then file for Chapter 13.
Keep in mind, that you won’t be able to get a discharge at the end of your Chapter 13 case because you just got one in Chapter 7. However, Chapter 13:
• gives you additional time (the length of your repayment plan) to catch up on secured debt or non-dischargeable debt that you can’t afford to pay all at once, and
• may allow you to cram down or strip off liens. (Your ability to do this in Chapter 13 varies by district. Check with an experienced bankruptcy attorney in your area.)
Special Strategies for Married Debtors
Married couples who need to file for bankruptcy can use additional strategies if it looks like their debts may exceed the Chapter 13 debt limits.
Spouses Can File Under Different Chapters
If one spouse’s debt puts both over the limit for a joint filing, you might get around the debt limits by having one spouse file for Chapter 7 bankruptcy and the other file for Chapter 13 bankruptcy. Here’s how it might work:
This requires a sophisticated legal analysis if:
• you have assets that are not protected by exemptions
• you live in a community property state
• you are claiming ownership of property as tenants by the entirety, or
• you are planning to use lien stripping or cram down.
Check with an experienced bankruptcy attorney in your area to make sure you are fully aware of any consequences.
Claim Expanded Debt Limits in Joint Cases
If you are a married couple filing a joint Chapter 13 bankruptcy, some courts will expand the debt limits. Others, however, won’t allow for any expansion. If your court is more flexible on the debt limits when it comes to joint Chapter 13 bankruptcies, this is likely how it will work: If you each qualify for Chapter 13 separately, the court will allow the Chapter 13 case to proceed (even if your debts taken together are above the limits). This does not mean that you have to file two cases, but it does mean that each spouse must have a source of income that could support a Chapter 13 plan and each spouse’s debts, individually, must not exceed the Chapter 13 debt limits. To determine the amount of debt, each spouse must include joint debt in its full amount along with that spouse’s individual debt.
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