Home equityLast Sunday, July 20, 2014, Liz Weston of the L.A. Times gave an interesting answer to a question posed by a reader of the newspaper’s Money Talk feature.  Today’s post adds to Liz’s advice.

The reader had accumulated $28,000 in credit card debt over the previous eight years, and had considerable law school debt and a home mortgage.  He wanted to know whether a home equity loan was a smart choice to solve his problems.

Liz gave a good answer, but the LA Times’ space constraints made it impossible for her to cover things in detail.  Her response included the statement:  “Bankruptcy probably isn’t in the cards for you, of course, given your resources.”  This led me to today’s post.

But first, a caveat:  In order to give the reader an accurate analysis of the application of bankruptcy to his problems, I would need a lot more information.  Thus, what I am about to say focuses on general principles, and is not a substitute for a thorough evaluation of the case using detailed documentation.


I.              Chapter 7 Bankruptcy

I suspect that Liz had Chapter 7 bankruptcy in mind when she made her comment.

In a Chapter 7 bankruptcy, the debtor’s dischargeable debts are discharged without the creditors getting anything.  Since this is such a big hit on the creditors, there are some limitations.  One such limitation is on what the debtor gets to keep.  The debtor keeps exempt assets,  but the Chapter 7 Trustee assigned to the case seizes and liquidates the nonexempt assets for the benefit of the creditors.

Given that the reader has enough equity that he was considering a home equity line of credit (“HELOC”), it may be that he has too much equity to fully exempt.  If that is the case, then a Chapter 7 bankruptcy might be a poor choice since he and his wife would lose their home to the depredations of the Chapter 7 Trustee assigned to the case.  Again, more detailed information about his assets and encumbrances against them are needed to say for sure.

However, two other chapters of the Bankruptcy Code may be worth considering because debtors filing bankruptcies under those chapters can keep their assets regardless of their value or exempt status.


II.              Chapter 13 Bankruptcy

In a Chapter 13 bankruptcy the debtor keeps all assets, whether exempt or nonexempt.

The Chapter 13 debtor enters a multi-year (but no more than five-year) debt repayment plan that is administered by the Bankruptcy Court.  The plan has to satisfy three main requirements.  One of them is the trade-off for the debtor getting to keep his all of his possessions.  It requires the debtor to repay the general unsecured creditors at least the dollar value of the nonexempt assets, or the total debt, whichever is smaller.

Chapter 13 plans are designed to be manageable.  Someone who goes into Chapter 13 is not stuck with one hot meal a day:  a bowl of steam.

In sum, the reader may wish to consider using Chapter 13 bankruptcy to make dealing with his debts manageable.


III.            Chapter 11 Bankruptcy

Chapter 13 has an important limitation.  If the debtor’s debts are too large, Chapter 13 is unavailable:

Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525, or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $383,175  and noncontingent, liquidated, secured debts of less than $1,149,525 may be a debtor under chapter 13 of this title.

11 U.S.C. § 109(e).

By the way, the numbers at the Cornell Law School site to which this links haven’t been updated for some time.  I corrected them in the quote above.  The quote is correct as of July 2014.

What options does a debtor have whose debts are too large for Chapter 13 and for whom Chapter 7 makes no sense?  For you macabre wags out there who said suicide, I counter with Chapter 11.

Chapter 11 is sort of like a Chapter 13 on steroids.  The chapter was designed for businesses that want to reorganize, so it is very complicated.  However, like Chapter 13, Chapter 11 involves a multi-year repayment plan, but with more flexibility than Chapter 13 — for example, the plan can last more than five years.  Unfortunately, since it is considerably more complicated than Chapter 13, it is also considerably more expensive.  Therefore, Liz’s reader should only consider Chapter 11 if the other chapters can’t be used.

If you are a debtor facing overwhelming debt and need bankruptcy protection, contact an extremely knowledgeable and highly skilled bankruptcy attorney to guide you through the process.


Image courtesy of Flickr (Licensed) by Mark Moz