Four Ways Around The Chapter 13 Debt Limit

Retreating property values strand would be Chapter 13 debtorsBankruptcy needs a higher debt limit, too.

My topic at the Bar Association of  San Francisco in late July was all of a piece with the national problems:  our debt ceiling was too low.  Of  course, I was addressing the debt limits in Chapter 13.  An increase of a few hundred thousand would have solved my problems.

Historically the concept of limiting access to Chapter 13 via a cap on the amount of debt found in §109  had two drivers: one was the super discharge, and the idea that such broad relief from debts tinged with misbehavior should not be too widely available.  The other was an attempt to find a balance between an economic and expedited procedure where creditors’ voices were limited and a traditional Chapter 11 where creditors vote on the plan and wield a lot more power in the process.

In the interval between the Code of 1978 and now, the dollar limits have not kept pace very well with middle class budgets and the credit explosion of the last decade.  Meanwhile, the super discharge shrank to almost nothing in 2005.

As if that wasn’t enough, the collapse of the housing market has left heaps of  junior liens that once secured  cash-out refinancing or aggressive home purchases stranded as the tide of supporting value retreated.

Since my phone call to Congress for some relief went unanswered, here are my thoughts on dealing with the existing debt ceiling.

  • File separate cases for spouses – Examine the distribution of debts between spouses to see if, filed separately, each individual would qualify for Chapter 13.  I see lots of situations where title to property and /or liability on the secured debts are not held symmetrically.  Another approach is to file a 13 for the spouse who qualifies and a Chapter 7 for the spouse with too much debt.
  • Analyze whether each unsecured debt is legally enforceable   This analysis encompasses both issues of the statute of limitations and the issue of whether a home loan provides for recourse or not.
  • Argue that debtors in joint cases get twice the debt limit  Expand on the idea that a joint case is really two cases and each debtor gets their own debt allowance.  Read and trumpet the holding in Werts.
  • Exploit Chapter 20  Consider whether your client’s aims can be achieved by discharging the dischargeable unsecured debt in a Chapter 7 , followed by a Chapter 13 (albeit one without a discharge) to repay priority claims or strip liens, or cure arrears.

None of this is quick or easy, but it is a way to distinguish yourself  in the sea of bankruptcy lawyers who just add up the numbers and shake their heads.  And, as I told my children repeatedly, you can do hard things.

Image courtesy of  Kevin Krejci

 

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  • Dorota Trzeciecka

    Great post, Cathy.   I have been struggling  with over the limit secured debt in Chapter 13.   I have a client whose secured debt is approximately $2,350,000.   I like your idea of filing Chapter 7 for him and Chapter 13 for the wife (provided she qualifies), or a joint Chapter 13.   They are desperate to save their home from foreclosure.   What actually happens if you file over the limit Chapter 13?   

  • Cathy Moran

    Generally some party brings a motion to dismiss or convert on the grounds the debtor is not eligible for Chapter 13.

    Remember that regardless of personal liability, in a subsequent 13, the mortgages of property of the estate will be secured claims up to the value of the property.

  • Cassierubald

    Cathy: 
     May I ask: 
    PC has three properties of which two are rentals and one is the Husband and Wife’s residence. All three properties have equity.  The secured debt is over the 109(e) secured debt limit by $132k+.Each of the three house has equity.  The husband is over 65 years old. The exemption of $175k may be enough to cover the one house, which happens to be the house that the Wife is not listed on the loan or title.If the Wife files Chapter 13 on the two houses she is listed on and then the Husband files Chapter 7 on all three properties, are the two houses in the C13 protected from the C7 trustee?This is a 100% plan with just the need to payback arrears on the mortgages.  There is about $800 in equity in the three houses.  Debts are in Taxes, credit cards, medical.

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