How To Get Around The Chapter 13 Debt Limits
Chapter 13 bankruptcy has a lot of benefits and advantages over a Chapter 7. Among other benefits, it can allow you to keep non-exempt property that may otherwise be lost in a Chapter 7 bankruptcy. It also may provide a smaller ding to your credit than Chapter 7.
Debt Limits With Chapter 13
However there is one area where Chapter 13 bankruptcy can be more limiting than Chapter 7. Unlike a Chapter 7 bankruptcy, where the debtor can owe any amount of money there is a maximum debt limit with Chapter 13 bankruptcy.
The limit changes, but as of the time of this writing, the debt limit is $394,725 for unsecured debts, and $1,184,200 for secured debts. Beyond these amounts and you are not eligible to file for Chapter 13.
Those may seem like large amounts, and most debtors will never approach these numbers. But for debtors who may have properties, personal guarantees on business loans, or significant medical expenses, those totals can be reached faster than you may think.
One strategy to allow someone to file for Chapter 13 who otherwise may not be able to is to try to lower the amount that is owed. Of course, this doesn’t mean just paying off debt, it means utilizing the bankruptcy code to your advantage.
Contingent and Unliquidated Debts
The amounts listed above are for actual current debts—not contingent debts. So for example, assume that you signed a personal guarantee promising to pay a debt if your business doesn’t pay. You only owe the debt if the loan defaults, and if the business cannot pay. That makes your obligation contingent, and thus, that debt doesn’t count towards the debt limit.
Some debts may be unliquidated. That means that the amount that is owed, may not be readily determined by the contract or loan agreement. Or, you may owe money for injuring someone, but the amount you owe cannot be calculated. These kinds of debts, where it can’t be readily determined what you owe, do not count towards the debt limit.
Dividing Debt With Cramdowns
You can also divide a secured debt into secured and unsecured debt. Here’s how.
Let’s say you owe $400,000 on property that is worth $300,000. You don’t have to count the entire $400,000 as secured debt. Rather, with a cram down which is available in Chapter 13, you can count $300,000 as secured, and the overage or balance–$100,00–as unsecured debt.
Remember as well that if you are filing as a married couple, you don’t have to file together, in the same case, in the same chapter of bankruptcy. If together your debt exceeds the Chapter 13 debt limit, you may be able to split your cases up, file under different chapters, and lower the amount owed so that one of you does qualify for a Chapter 13.