Chapter 13 Dismissal

Posted by Kevin on July 8, 2011 under Bankruptcy Blog | Be the First to Comment

In a Chapter 13, the debtor is limited to  $360,475 of unsecured debt.  Unsecured debt is debt where there is no collateral.  Like credit card debt.

However, in a Chapter 13, a debtor can strip off otherwise secured debt that is completely underwater.  For example, if your house is worth $300,000 and the first mortgage is for $350,000 and the second mortgage is for $100,000, the second mortgage is totally unsecured and could be “stripped off”.  When it is stripped off, it  becomes unsecured debt and must be added to other unsecured debt.

In a recent Chapter 13 bankruptcy case in Kentucky, the debtor indicated that his land was worth only $60,000 subject to $301K of secured claims.  In addition, the debtor indicated $291K of unsecured claims.  The Chapter 13 trustee moved to dismiss the case because the unsecured debt limits were exceeded.  The Court agreed.  What happened was that when you added the amount of the second mortgage to the unsecured claims, they exceeded $360,475.  The debtor argued that the second loan was guaranteed by the USDA so that it should be counted as secured.  Court said no.

Chapter 13 allows a debtor to strip off a wholly unsecured mortgage.  Usually, this is beneficial to the debtor, but it can cut both ways.