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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.

Chapter 13 Basics-Why File?

Posted by Kevin on November 3, 2017 under Bankruptcy Blog | Be the First to Comment

In Chapter 7, debtors make no payments to their creditors but a Chapter 7 trustee can sell all non-exempt property and pay unsecured creditors.  The process is over in 4 months or so, and the debtor obtains a discharge of most of her debts.  In Chapter 13, however, debtors get to keep even their non-exempt property but must make monthly payments to the Chapter 13 trustee for a period of 36 to 60 months before they can get a discharge of most of their debts.

So, we are assuming that you are having trouble paying your bills.  You are contemplating bankruptcy.  Why would you choose to make payments for 3 to 5 years to get a discharge when you can pay nothing and get a discharge in 4 months.  Well, there are a number of reasons why prospective debtors pick Chapter 13.  In 2005, Bankruptcy Code was amended by a law referred to as BAPCPA.   BAPCPA adopted what is called the Means Test to determine if you could file under Chapter 7.  If your income based on family size exceeds the median for your State, you must pass the Means Test to file under Chapter 7.  The Means Test is based on IRS tests to determine how much a taxpayer can pay in back taxes.  So, if you are above median income and you fail the Means Test, you cannot file Chapter 7, and are be required to file under Chapter 13 if you otherwise qualify.

But, there are other reasons to file under Chapter 13 even if you pass the Means Test.  Say you own a home with significant equity.  In a Chapter 7, the trustee can sell your home and pay off your creditors.  In a Chapter 13, if you make all payments under a Plan confirmed by the Court, you can keep your home.  In addition, let’s say that you own a home but are in arrears on the mortgage.  In Chapter 13, you can pay off the arrears over the term of the Plan.  That could be up to 60 months.

Finally, say your house was worth $400,000 when you bought it, but after the mortgage crisis, it is only worth $250,000.  You owe $270,000 on a first mortgage and $50,000 on a second mortgage.  In this case, the collateral covers most of the first mortgage, but the second mortgage is completely unsecured.  In other words, if there was a foreclosure, the first mortgage holder would be paid a good amount of what it is owed, but the second mortgage holder would get nothing.  In Chapter 13 in our example, you can “strip off” that second mortgage and treat it as unsecured debt since there is no collateral to attach to that mortgage.  So, instead of making monthly payments of, say, $300 per month on the second, that creditor gets only a pro rata share of what is paid to the unsecured creditors.  If your plan payment is, say, $100 per month, then the second mortgage holder gets to share that $100 with the other unsecured creditors instead of getting $300 per month.  A substantial savings.   If you make all the payments, the second mortgage holder is required to release the mortgage lien of record.

In some cases, you are forced into Chapter 13, but that does not mean that Chapter 13 cannot provide some real benefits, especially to homeowners.  If you think Chapter 13 can help your situation, you should speak with an experienced bankruptcy attorney.  Chapter 13 is not a DIY project.