Chapter 13 bankruptcy 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.
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 modified quote is correct as of September 2014.
If either debt ceiling — either the secured, or unsecured — is exceeded, the debtor is ineligible for Chapter 13 protection, and must consider Chapter 11 bankruptcy. This leads to the following question that was posed by a fellow bankruptcy attorney:
Suppose a debtor has a mortgage — for simplicity let’s say a first mortgage — that is undersecured, i.e., the value of the house is less than the current balance on the mortgage. Does the unsecured portion of the mortgage count toward the $383,175 unsecured debt ceiling?
My answer was: It depends on whether or not the house is the debtor’s principal residence. But it’s a bit more complicated than you might imagine. Let’s start with the simpler “nonprincipal residence” scenario.
Continue Reading The Chapter 13 Bankruptcy Debt Limits And An Undersecured Mortgage On A Principal Residence