September 25, 2017

The Chapter 13 Bankruptcy Debt Limit

I meet with clients almost daily.  During my free in-office bankruptcy consultation, I conduct an in-depth analysis of a client’s legal issues as it pertains to bankruptcy. Most often, a client will choose to file a chapter 7 bankruptcy, provided he or she meets the eligibility requirements for a chapter 7.  If the circumstances warrant a chapter 13 bankruptcy filing, I will discuss with a client how a chapter 13 operates and, given the facts, how this chapter of bankruptcy may be the best option.  But sometimes a client may not be eligible to file a chapter 13 bankruptcy, although this chapter may be the most preferable given a client’s particular set of facts.   One reason a chapter 13 bankruptcy filing may not work is that a client may have too much debt.  This post discusses the chapter 13 restriction of debt load in-depth.

A chapter 13 bankruptcy, or a “restructuring bankruptcy,” is a bankruptcy that lasts between 3 to 5 years, with monthly payments being made by the consumer for the benefit of creditors.  A chapter 13 bankruptcy does have certain restrictions, however, particularly when it comes to how much debt a consumer can have to be eligible to file a chapter 13 bankruptcy.  Currently, a consumer must have less than $360,475 in unsecured debts (not attached to collateral, such as medical bills, credit card bills, etc.) and less than $1,081,400 in secured debt (such as mortgages on a house, car loans, etc.).  These numbers adjust periodically.

Most people who consider filing a chapter 13 bankruptcy fall below these total debt thresholds. But what if a consumer exceeds these thresholds?  What options does he or she have?

I recently wrote a post on “Chapter 20” bankruptcy (chapter 7 + chapter 13) detailing one strategy to combat the debt ceiling.  If a consumer’s debt is higher than the allowable thresholds for a chapter 13 bankruptcy, one option is to file a chapter 7 bankruptcy, eliminate the unsecured debt, and then file a chapter 13 bankruptcy on the heels of a chapter 7 bankruptcy.  Often times, by eliminating the dischargeable unsecured debt first in a chapter 7 bankruptcy filing, this may qualify a consumer for a chapter 13 bankruptcy filing since the debt load may substantially decrease.  Using a “Chapter 20” approach applies in a very narrow set of circumstances, though.

The other option we always consider before looking at a chapter 13 bankruptcy, is a chapter 7 bankruptcy filing.  A chapter 7 bankruptcy will eliminate most debts and contains absolutely no debt ceiling.  But to file a chapter 7 bankruptcy, certain eligibility requirements must be met first.  For example, a consumer must not have filed a chapter 7 bankruptcy in the previous 8 years.  The second eligibility criteria for a consumer is to be able to pass the chapter 7 bankruptcy “means test” which is based on income and household size.  If a consumer’s income is too high based on household size he or she may be ineligible to file for a chapter 7 bankruptcy.  Therefore, in some instances a consumer may not even qualify for a chapter 7 bankruptcy.

Now, what if a consumer is above the debt threshold of $360,475 in unsecured debt and/or $1,081,400 in secured debt, and he or she does not qualify for a chapter 13 bankruptcy? And what if that same consumer’s income is too high to be eligible for a chapter 7 bankruptcy? Where do you turn?  Chapter 11 bankruptcy.

Chapter 11 bankruptcy is mainly for business reorganization, but can be a useful bankruptcy tool for some consumers who do not qualify for a chapter 7 bankruptcy because of too high of income and does not qualify for a chapter 13 because of too high of debt load.  Chapter 11 is a very complicated form of bankruptcy.  The situation that necessitates the need to file a chapter 11 bankruptcy for an individual consumer is rare.

If you are interested finding out more about bankruptcy, please call today to schedule your free in-office bankruptcy consultation in Eugene.

 

 

The Many Chapters of Bankruptcy

As a consumer bankruptcy attorney, I limit my practice to chapter 7 bankruptcy and chapter 13 bankruptcy filings.  Most individuals and small businesses fall into either one of these two types of bankruptcies.  But there are many other chapters of bankruptcy beyond just a chapter 7 bankruptcy and a chapter 13 bankruptcy.  This article discusses chapter 7 and chapter 13 bankruptcy along with the lesser known chapters of bankruptcy, and when and why these chapters may be appropriate.

Chapter 7 Bankruptcy: A chapter 7 bankruptcy is the most common bankruptcy for consumers.  Also known as a liquidation bankruptcy, chapter 7 eliminates most, if not all, consumer debts.  The time frame, from start to end, is usually about 90 days.  When people think about bankruptcy, they usually think of chapter 7.

Chapter 9 Bankruptcy: A chapter 9 bankruptcy is a bankruptcy specifically tailored for government municipalities to reorganize debt.  For example, both Stockton, California, and Detroit, Michigan are currently in chapter 9 bankruptcy proceedings.

Chapter 11 Bankruptcy:  A chapter 11 bankruptcy usually applies to businesses and is used as a restructuring tool.  A few of the major car manufactures have entered into a chapter 11 bankruptcy, and have come-out of the process as a restructured company (such as Chrysler); however, other companies have attempted a chapter 11 restructuring, but failed, and ultimately converted to a chapter 7 bankruptcy (Hostess, for example).

Chapter 12 Bankruptcy: A chapter 12 bankruptcy is exclusively available to family farmers and fishermen.  This form of bankruptcy is similar in substance and procedure to a chapter 13 bankruptcy.

Chapter 13 Bankruptcy:  A chapter 13 bankruptcy is the second most common type of bankruptcy, following chapter 7.  A chapter 13 bankruptcy allows for the restructuring of a consumers debt over 3-5 years, where the consumer makes monthly payments to the plan for the benefit of creditors.  Often, a chapter 13 bankruptcy is used to stop a foreclosure and catch up on mortgage arrears, pay down tax debt and domestic support obligations, cram down vehicle loans in terms of a principal reduction of loan amount and interest rate,avoid second liens on properties (in some instances) such as home equity lines of credit, and so on.  In some instances, a consumer may not be eligible to file for a chapter 7 bankruptcy due to high income or a prior chapter 7 bankruptcy filing, and therefore must file a chapter 13 bankruptcy instead.

Chapter 15 Bankruptcy: A chapter 15 bankruptcy is designed for ancillary or cross-border claims; this includes debtors, assets, and claimants involving multiple countries.

Chapter 7 bankruptcy and chapter 13 bankruptcy are the most well-known of the bankruptcy chapters in the United States.  However, there are other chapters available for a debtor (individual, business, municipality), provided the right circumstances exist.

If you are interested in learning more about bankruptcy and how it may benefit your financial situation, please call today for a free in-office bankruptcy consultation in Eugene.

Pursuant to 11 U.S. Code § 528: "I am a debt relief agency. I help people file for bankruptcy relief under the Bankruptcy Code."

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