While would-be Chapter 7 bankruptcy filers are subjected to a complex calculation involving debts, income, and expenses, the hurdles for those pursuing Chapter 13 bankruptcy are different. Generally, Chapter 13 bankruptcy will be an option if the debtor:
- Is an individual–there is no Chapter 13 bankruptcy for businesses,
- Is not disqualified by a recent dismissal,
- Has demonstrable means to make plan payments, and
- Does not have debts exceeding the current Chapter 13 debt limits
In a general sense, Chapter 13 bankruptcy is more accessible than Chapter 7 because Chapter 13 involves a repayment plan, and plan payments are based on the debtor’s disposable income. While the Chapter 7 means test is intended to ensure that people discharging their unsecured debts are truly unable to pay them, the Chapter 13 process itself regulates what is paid and what is discharged based in large part on the debtor’s ability to pay.
What are Chapter 13 Debt Limits?
Chapter 13 debt limits create a cap on the amount of debt a person may have and still be eligible for Chapter 13 bankruptcy. The limits are adjusted every three years, most recently on April 1 of this year. Current debt limits are:
Secured debts: $1,257,850
Unsecured debts: $419,275
That’s up from a limit of $1,184,200 in secured debt and $394,725 in unsecured debt for the previous three-year period.
Who is Affected by Chapter 13 Debt Limits?
At first glance, those numbers seem pretty high. But, some debtors are disqualified by the amount of debt in one or both of these categories. For instance, in California, mortgage debt may be an obstacle. Although the median mortgage amount across the state is just shy of $350,000, a growing number of homes across the U.S. are currently valued at $1 million or more. In fact, the percentage of homes worth more than $1 million more than doubled between 2012 and 2018. And, those high-value homes are heavily concentrated in California.
While the nationwide percentage of million-dollar-plus homes stands at about 3.6%, 19.6% of Los Angeles homes cross the million-dollar line. And, in other areas of the state, those rates are even higher: 30.7% in Oakland, 70% in San Jose, and 81% in San Francisco. Thus, a California homeowner who is under water on his or her mortgage, or just carrying a significant mortgage on a high-value property, could be disqualified.
An increasing number of debtors are also carrying student loan debt that exceeds the $419,275 ceiling, or combines with other debts to push the total beyond the limit. Though statistics on the precise number of borrowers saddled with student loans that would exceed Chapter 13 limits isn’t readily available, Forbes tells us that more than 600,000 Americans are currently carrying more than $200,000 in student loan debt.
However, there may be relief for student loan debtors. At least one court has ruled that a court need not dismiss the case of an otherwise qualified Chapter 13 debtor solely because student loan debt puts him over the debt limit.
Exceptions to Chapter 13 Debt Limits
Chapter 13 debt limits apply only to non-contingent, liquidated debts. That means that certain financial obligations—contingent and non-liquidated debts–won’t be counted toward debt limits for purposes of determining Chapter 13 liability.
A contingent debt is a debt you’re not obligated to pay unless and until some other event occurs. One common example is when the individual has personally guaranteed a business loan. In that situation, the individual typically has no obligation to pay the outstanding debt unless and until the business defaults. Therefore, if the loan is in good standing, the individual does not yet owe the debt—and may never owe the debt. So, the debt won’t be counted when calculating aggregate debts for Chapter 13 qualification purposes.
It’s important to note, though, that this exception generally does not apply to co-signed debts. Although as a practical matter a co-signer typically won’t have to make payment on a loan unless the primary borrower defaults, the contract usually obligates both the borrower and the co-signer. So, even though you may not be making payments (and may never make payments) on a loan you co-signed for a friend or family member, this type of debt will usually count toward the limit.
A non-liquidated debt is a debt that is not yet certain, either as to liability or as to the amount you may be obligated to pay. For example, if there is a lawsuit pending against you because someone sustained an injury on your property, it is not yet certain that you will be found liable for the injury, nor can the amount of any possible obligation be reliably determined. Thus, this type of debt will also be excluded from the debt limit calculation.
Options for Debtors Exceeding Chapter 13 Debt Limits
One option for individuals whose debts exceed the Chapter 13 caps may be to file for bankruptcy protection under Chapter 11. However, Chapter 11 is rarely a good option for consumer debtors, as the process is much more cumbersome and expensive than either Chapter 7 or Chapter 13.
Another possible option for some debtors is to file for Chapter 7 bankruptcy first, discharging enough unsecured debt to bring the remaining balance within debt limits. However, this option won’t be workable for all debtors, since some may be disqualified by the Chapter 7 means test and some may have too much non-exempt property to file for Chapter 7 and retain their assets.
The best way to determine the best option in your specific circumstances is to speak with a local bankruptcy attorney about your debts, income, asset, and goals. You can schedule a free consultation with one of the experienced bankruptcy lawyers at Borowitz & Clark by calling 877-328-1497.