Tactics You Can Use to Meet Debt Limits In Chapter 13 Bankruptcy

by
Richard Fonfrias, J.D.
Chicago's Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC



Chapter 13 Debt Allowances

You can file a Chapter 13 bankruptcy if your non-contingent, liquidated debts are under the limits in the bankruptcy law. These debt limits change every three years. Today (2016), if your secured debts, like mortgages and liens, do not exceed $1,184,200 -- or if your unsecured debts do not exceed $394,725, then you can benefit from Chapter 13. And if your debts are over those limits, you might be able to reduce your debts so they fall below the limits. Make sure you speak with a qualified bankruptcy lawyer. (You're invited to call me at 312-969-0730.)

You Should Review and Classify Your Debts

Some of your current debts may not count toward the Chapter 13 debt limits. Also, you may be able to reclassify some secured debts into secured and unsecured parts. This would raise your unsecured debt and lower your secured debt.

Your bankruptcy paperwork requires that you list "contingent" and "unliquidated" debts, but those debts don't count toward the law's debt limits.

Contingent Debts – are debts that you don't have to pay unless something specific takes place, which is a contingency. Examples include a personal guarantee, which doesn't require that you pay anything unless someone else defaults on a loan. If the event has not yet occurred, then you don't have to count your potential debt toward the debt limits.

Cosigned debts are tricky. You might think they are contingent, meaning you don't have to pay the debt unless someone else doesn't pay it. But in most cases, that is not true. With a cosigned debt, both you and the other person are legally and equally responsible for the payment.

Unliquidated Debts – are debts where either (1) your responsibility to pay the debt has not yet been confirmed, or (2) the amount of the debt cannot be established. An example is a personal injury claim where the amount isn't yet known. On the other hand, a broken contract claim, where the amount is known or can easily be determined, may not fit under "unliquidated".

You Should Classify Your Debts as Secured and Unsecured

If your bankruptcy lawyer can lien strip an obligation – or cram-down the obligation to a lower amount, the remaining amount of your obligation is a secured debt. The amount of the obligation that is removed is converted to an unsecured debt.

This raises the amount of your unsecured debt and lowers the amount of your secured debt, either of which might help you stay within the Chapter 13 debt limits.

Not Good Enough? Then Consider a Chapter 20 Bankruptcy

A Chapter 20 bankruptcy is where you use both a Chapter 13 and a Chapter 7 bankruptcy. It works like this:

First, your bankruptcy lawyer files a Chapter 7 bankruptcy, assuming you can meet the Chapter 7 requirements. In Chapter 7 you erase unsecured debts. This alone might help you fall within the Chapter 13 debt limits. Then you file a Chapter 13 bankruptcy.

You are allowed to get a bankruptcy discharge in only the first case. So you won't get a discharge at the end of your Chapter 13, which is OK because it helps you as follows:
  • It gives you three to five years to get caught up on your secured debts, and
  • It might allow your lawyer the opportunity to cram-down or strip off liens, reducing your secured debt.
Tactics for Married Couples

If it appears that a couple's debts may exceed the Chapter 13 debt limits, then the spouses can each file bankruptcy under different chapters. Like this:

John and Mary want to use a Chapter 13 repayment plan to bring their mortgage payments current. But Mary's unsecured business debts exceed the debt limit for Chapter 13. John is not obligated to pay Mary's business debts and he wants to protect his own business. So Mary files Chapter 7 bankruptcy and John files a Chapter 13 bankruptcy. Mary's business debts are discharged in her Chapter 7 bankruptcy and John can bring the mortgage payments current in his Chapter 13 repayment plan.

Now, your bankruptcy lawyer must review your circumstances carefully (1) if your property is not fully protected by bankruptcy exemptions, (2) if community property applies in your state, or (3) if you hope to lien strip or cram down your secured debts.

In a situation like this, make sure you consult with an experienced bankruptcy lawyer. You're always welcome to call me at 312-969-0730.

Another strategy in joint cases is to claim expanded debt limits.

Some courts will increase the debt limits in Chapter 13 bankruptcies for married couples filing jointly. So make sure you check with a qualified bankruptcy lawyer to learn how judges in your area treat debt limits.

If the court increases your debt limits, it works like this: If each spouse qualifies under Chapter 13 debt limits separately, then the court will allow the Chapter 13 bankruptcy to move forward, even if the debts added together exceed the limits.

In this case -- when each spouse has income that can apply to his or her Chapter 13 plan, and when each spouse's debts do not exceed the debt limits -- the couple can file a single joint bankruptcy. Like this:

John and Mary, a married couple, have $425,000 in unsecured debt, which exceeds the $394,725 unsecured debt limit for Chapter 13 bankruptcy. Both John and Mary work and have secured debt under the limit. Together, they owe $210,000 in unsecured debt from a business failure. John has another $175,000 in unsecured medical bills and Mary has $45,000 in unsecured credit card debt.

Each person would qualify for Chapter 13 bankruptcy individually: John with $385,000 in unsecured debt and Mary with $255,000 in unsecured debt. The court might allow them to file a joint Chapter 13 bankruptcy even though their unsecured debt totals $425,000.

As you can see, filing for bankruptcy is neither simple nor straightforward. Even deciding on which type of bankruptcy to file is not always clear-cut, as the type of bankruptcy that is best for one person is not necessarily the right one for someone else. Everything depends on each individual’s set of circumstances. An experienced bankruptcy attorney has the knowledge and the expertise to determine your best course of action after thoroughly assessing your personal situation. If you have any questions, please give me a call at 312-969-0730 or email rich@chicagomoneylawyer.com

Rich Fonfrias