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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.

Dumping Your Chapter 7 Case Midstream, or Switching to a Chapter 13 One

Posted by Kevin on August 3, 2017 under Bankruptcy Blog | Comments are off for this article

You can usually change from an ongoing straight Chapter 7 case into a Chapter 13 payment plan. But getting out of bankruptcy altogether is generally not allowed.

Most Chapter 7 cases are finished in about 3 months. For the most part, the bankruptcy trustee determines that everything you own is covered by property exemptions, so you get to keep it all—the trustee has “no assets for a meaningful distribution to the creditors.” You get your deb discharged and your case is closed. Not much time for your circumstances to change.

But sometimes things happen. Things do in fact change. Your uncle dies unexpectedly and even more unexpectedly you get a chunk of an inheritance. Or you find out you have an asset you didn’t know about. Or something you own is worth much more than you expected. Or you run up a major medical expense right after filing. So now you don’t want to be in the Chapter 7 case, or maybe not in that Chapter 7 case. What can you do?

Common sensically, you figure you can either end your case or switch it to some other kind of bankruptcy.

Dismissal of a Chapter 7 Case

But unlike Chapter 13, you don’t have a right to just end—“dismiss”—a Chapter 7 case.

Why not? You filed the case; why can’t you just end it?

Because the Bankruptcy Code does not give you that right. The theory is that if you submit yourself, and your assets, to the bankruptcy court in order to get the benefits you want from it—immediate protection from your creditors and a discharge (legal write-off) of all or most of your debts—then you’ve got to live with the consequences.

It’s as if you’ve created a new legal person—your “bankruptcy estate”—with the Chapter 7 trustee in charge of it. This new “person” does have a life of its own of sorts, and doesn’t disappear just because you change your mind.

That doesn’t mean you can’t ever get the court to dismiss your case. It just means that you have to have a really good reason. One that doesn’t just benefit you, but also your creditors.

Getting  out of a Chapter 7 is a “depends-on-the-circumstances” situation. Honestly, having an experienced attorney at your side would be critical for knowing what to do if this kind of thing happened to you.

Conversion of a Chapter 7 Case

Changing your case from a Chapter 7  before it’s done into a Chapter 13  is much easier. The Bankruptcy Code says that the “debtor may convert a case under this chapter [7] to a case under chapter… 13… at any time, if the case has not been [already] converted… .” (Section 706(a).)

To do so, you do have to qualify for Chapter 13. Among other requirements, this means:

1) you can’t have more debt than certain limits—$394,725 in unsecured debts and $1,184,200  in secured debts (until these amounts are revised as of 4/01/13) (Section 109(e)); and

2) you must be an “individual with regular income,” meaning that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan.” (Sections 109(e) and 101(30).)

Whether or not you’d want to convert from Chapter 7 to Chapter 13 depends—naturally—on the circumstances. At first blush, changing from what you might have expected to be a three-month procedure into one that will likely take three years or more probably doesn’t sound so good. But if you are converting the case to preserve an asset, or to deal with a special creditor, Chapter 13 can be a very good tool for these purposes.

If either your financial circumstances significantly change after your Chapter 7 case is filed, or your case proceeds in an unexpected direction, Chapter 13 may have actually have been your better alternative at the outset. And if not, it can be a very sensible second choice.