Chapter 13 Basics- Debt Limits

Posted by Kevin on November 22, 2017 under Bankruptcy Blog | Be the First to Comment

In the prior blog, we learned that you may be required to file under Chapter 13 because, simply put, you make too much money to file under Chapter 7.   Guess what?  There are restrictions on filing Chapter 13 also.  First, you must be an individual.  That means a live person.  Second, you must have regular income.  That usually means a job, but it can even include social security or public assistance.  Third, your secured debts cannot exceed $1,184,200.  Fourth, your unsecured debts cannot exceed $394,725.  Items three and four are commonly called Debt Limits which are adjusted periodically.

So, what’s a secured debt.  It means generally any debt for which you have given collateral.  Examples: a home mortgage or a car loan.  But, it can also include a judicial lien, a statutory lien or a filed IRS tax lien.  A judicial lien comes about when someone gets a judgment against you, and the sheriff  attaches a specific item of property like your bank account.  A statutory lien comes about by law.  An example is your real estate taxes.

Unsecured claims can be credit cards, medical bills, loans that you guaranteed for your business, and priority debts like back child support.

In the prior blog, we learned that a debtor in Chapter 13 can strip off a second mortgage if that mortgage is totally underwater.  For example, your home is worth $200,000.  The first mortgage is for $250,000 and the second mortgage is for $100,000.  The second mortgage is recorded and would otherwise be considered a secured claim except that there is no collateral to attach to it because the first mortgagee is owed more than the collateral is worth.  In that case the stripped off second mortgage becomes an unsecured claim.

So, how do you count the second mortgage when you are figuring out the Debt Limits for Chapter 13.  In our example, the stripped off second mortgage is counted with the unsecured claims.  So, in our case, you have to add the $100,000 to your other unsecured debts even though there was a mortgage.

Sometimes, the stripped off second mortgage can put you over the Debt Limit for unsecured debt.  What happens then?  Well, if you do not qualify for Chapter 7, your only alternative is Chapter 11.  Ouch.  Although individuals can file Chapter 11, that is an expensive proposition.