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Archive for the ‘Chapter 13 debt limits’ tag

Simple and Not-so-simple Debts in Chapter 7 and 13

November 24th, 2017 at 8:00 am

Very broadly speaking Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.


Debts in Bankruptcy

When deciding between Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts” you look at many factors. You have to meet certain qualifications (usually easy to meet) to file either one. The amount of your income, the nature of your assets, whether you own a business, and your immediate and long-term goals—all of these come into play.

But the most important consideration is your debts. Bankruptcy is of course mostly a tool for dealing with your debts. Chapter 7 and Chapter 13 each deal better than the other with certain types and combinations of debts.

Today we get into which of these two consumer bankruptcy options is better for which debt scenarios.

A Helpful Starting Point

Our first sentence gives us a good starting point. Chapter 7 handles simple debts as well or better than Chapter 13 does, which handles more difficult debts better.

So if you have mostly or all simple debts, then Chapter 7 will tend to be better for you. If you have a number of difficult debts, Chapter 13 will more likely be better.

The Different Types of Debts

There are basically three types of debts:

  1. General unsecured—There’s no collateral or “security” tied to these debts (“unsecured”), and they aren’t “priority”—given special treatment in the law. General unsecured debts include most credit cards, medical debts, no-collateral personal loans, utility bills, back rent, and many, many others.
  2. Secured—The debts are legally tied to collateral or with a lien on something of value. Included are home mortgages, vehicle loans, retail debts secured by the goods purchased, personal loans secured against personal possessions, business loans secured by business and/or personal assets—all debts secured by anything you own.
  3. Priority—Simply, debts that the law treats as special for whatever policy reason. The main examples for consumer debtors are recent income and other taxes, and child and spousal support.

These different types of debts are treated differently in Chapter 7 vs. Chapter 13.

Debt Scenarios Handled Well by Chapter 7

If ALL your debts are general unsecured debts, Chapter 7 will more likely be your better option. Most general unsecured debts are discharged—legally written off—in a Chapter 7 case. So you file a Chapter 7 case through your bankruptcy lawyer in usually less than 4 months all your debts are discharged. You have your fresh financial start.

Some secured debts are handled reasonably well in a Chapter 7 case. If you are current on a home mortgage or vehicle loan, you can usually keep your home or vehicle by maintaining your payments and “reaffirming” the debt. If you are very close to being current, you may be able to catch up and “reaffirm” as well. If you are surrendering a home or vehicle (or any other collateral) Chapter 7 often works well for that.

Chapter 7 may be appropriate for dealing with certain limited priority debts. If you owe an income tax debt or are behind on child support, discharging all or most of your other debts may enable you to catch up on the tax or support. But you are subject to collection actions by the tax authorities as soon as your Chapter 7 is over. And as for support debt, a Chapter 7 filing does not stop its collection even while your bankruptcy case is active. So if you owe any tax debt that you can’t comfortably pay through a standard IRS/state payment plan, Chapter 13 may be the better option. And if you are behind on child or spousal support, only Chapter 13 can stop the aggressive collection actions that an ex-spouse or support collection agencies can use against you.

Debt Scenarios Not Handled Well by Chapter 13

If ALL your debts are general unsecured debts, Chapter 13 is usually not your better option (assuming you have a choice). That’s because unlike Chapter 7, in a Chapter 13 case you usually have to pay a portion of your general unsecured debts. You pay as much of those debts as you can afford to do so over a 3 to 5-year period. Then the portion you did not pay gets discharged.

It’s important to understand that the general unsecured debts are often paid relatively little in a Chapter 13 case. It’s common that you’d pay only 5 or 10 cents on the dollar, and almost always no interest or penalties. In many parts of the country you can even pay 0 cents on the dollar. That’s because the debtor owes secured or priority debts which use up all the money he or she can afford to pay.

Debt Scenarios Handled Well by Chapter 13

Chapter 13 deals with secured debts often better than does Chapter 7. That’s especially true if you’re behind on a debt with collateral you really want to keep. Under Chapter 7 you’d usually have to get current on a vehicle almost immediately to be able to keep it. You have many months—or even a year or two—to catch up under Chapter 13. If you’re behind on your home mortgage you get up to 5 years to catch up.

Chapter 13 also gives you some very powerful tools for dealing with secured debts unavailable under Chapter 7. You may be able to “strip” a second or third mortgage off your home’s title. You may be able to do a “cramdown” on your vehicle loan or other personal property debt, potentially greatly reducing your monthly payment and the total you pay.

With priority debts, Chapter 13 gives you tremendous power and flexibility. It stops collection of support arrearage, and gives you months or years to catch up—as long as you keep current on ongoing support. With unpaid income taxes Chapter 13 provides many benefits. It prevents future tax liens. It enables you to deal with prior-recorded tax liens extremely well. Chapter 13 gives you up to 5 years to pay taxes that can’t be discharged. Usually throughout that time you pay no ongoing interest or penalties.

Conclusion 

It’s a bit of an oversimplification to say that simple debts lead to Chapter 7 while more complicated ones lead to Chapter 13. But, as we’ve just shown, that’s often the situation.

But just as you are a unique human being, your circumstances are unique. Get the unique assessment of your options that you need from an experienced and empathetic bankruptcy lawyer.

 

A Chapter 13 Debt Limit Increase

March 9th, 2016 at 8:00 am

As of April 1, 2016 you can have a little more debt and still qualify for a Chapter 13 “adjustment of debts.”

 

Why Debt Limits in Chapter 13?

You can have an unlimited amount of debt when you file a Chapter 7 “straight bankruptcy.” However, there are debt limits when filing a Chapter 13 “adjustment of debts for an individual with regular income.” How come the difference?

Chapter 7 is relatively straightforward, and in most consumer cases is done in only 3 or 4 months. There is a quick determination whether everything the debtor owns is “exempt”—protected from the creditors. If everything is, then the bankruptcy trustee declares the case to be a “no asset” one, nothing is liquidated, and the debts that can be discharged (legally written off) are discharged and the case is closed.

Chapter 13 is much more complicated. It involves a court-approved payment plan usually lasting 3 to 5 years.  An intricate set of rules determine how different kinds of creditors are paid (or the extent to which they’re not paid). Those rules contain many advantages for debtors not available under Chapter 7 for dealing with their home mortgages, vehicle loans, child and spousal support, income tax liens, student loans, co-signed debts, loans secured by personal property, recent income taxes, unprotected (“non-exempt”) assets, and more.

When Congress overhauled these rules in the late 1970s to encourage more debtors to file Chapter 13 cases, it also decided that this procedure should NOT be available to people with large amount of debts. So it capped the amount of debts that a person filing under Chapter 13 could owe. Originally the cap on unsecured debts was $100,000 and on secured debts was $350,000. If an individual or a married couple had more in either unsecured or secured debts they were not eligible for Chapter 13 relief.

Increases in Debt Limits

If those debt limits sound low, indeed they have been greatly increased in the decades since then. In 1994 Congress upped the $100,000 unsecured debt limit to $250,000 and the $350,000 secured debt limit to $750,000. It also arranged for cost of living adjustments every 3 years since then. One of these adjustments is coming up on April 1, 2016. The current $383,175 unsecured debt limit is going up to $394,725 and the $1,149,525 secured debt limit to $1,184,200.

Why Does It Matter?

These current amounts may sound relatively high, at least for a relatively simple consumer case. But note that Congress was specifically trying to make Chapter 13 available to small business owners. The debt limits were intended to be high enough to “permit the small sole proprietor, for whom a chapter 11 reorganization is too cumbersome a procedure, to proceed under chapter 13.”

Fitting under the Chapter 13 debt limits matters because if your debt is too high the main alternative is Chapter 11 “reorganization.” For Congress to call Chapter 11 “cumbersome” is a huge understatement.

Chapter 13 is efficient, and thus relatively inexpensive, for debtors in many ways, one of the main ones being that creditors need to object if they don’t like what the payment plan proposes. Although there is a fair amount of flexibility for the debtor, creditors mostly don’t object as long as the debtor’s plan follows the rules. In contrast, in Chapter 11 there is a voting procedure so creditors all have their say about whether a payment plan is approved. So, much more time-consuming and expensive negotiation is involved.

For this and other reasons even the most straightforward Chapter 11 case can easily cost 10 times what a straightforward Chapter 13 would cost. As one small indication of the cost difference, the court filing fee alone for a Chapter 11 case is $1,717 vs. only $310 for a Chapter 13 case (effective starting January 1, 2016).

Clearly, if you want the advantages of Chapter 13 and need to avoid the very high costs of Chapter 11 both your secured and unsecured debts need to be below the debt limits.

What Are “Noncontingent, Liquidated” Debts?

One way to get under the debt limits is to recognize that only “noncontingent, liquidated” debts count towards those limits. (See Bankruptcy Code section 109(e).) Debts that are either “contingent” or “unliquidated” don’t count. So if you are close to or over the limits, review your debts to see if any can be excluded.

Contingent debts are those that depend on some future occurrence that isn’t sure to happen.

For example, if you cosigned a loan on behalf of a family member who is currently paying the loan on time, you won’t be liable unless that principal debtor defaults on the payments. Your liability as cosigner is contingent until and unless there a default.

Unliquidated debts are those that do not have a determinable cash value. The debt may exist but no amount has been determined. However, even if you don’t know the amount you owe on a debt but it’s “readily capable” of being determined “by simple mathematical computation,” it’s still considered liquated for Chapter 13 debt limit purposes.

For example, if you were injured in a vehicle accident, you may have hired an attorney under an agreement by which he or she will receive a percentage of the recovery if you win. The debt to the attorney is unliquidated because you don’t know how much, if any, you will owe to him or her. It is not determinable by simple calculation at the time your bankruptcy case is filed.

But these definitions are sometimes difficult to apply. For example, if a debt is disputed by the debtor does that make it unliquidated? The answer may depend on the nature and validity of the dispute. It may even depend on what part of the country you live in and how courts have ruled on this question. Arguably if the bankruptcy court would need to weigh evidence to resolve the dispute about the liability or its amount, then the debt is unliquidated.

How about undersecured debts, where the collateral securing the loan is worth less than the amount of debt owed on it? Does all of that debt count as secured for purposes of the debt limits? Or is that debt divided into the secured portion (the value of the collateral) and unsecured portion (the remaining amount beyond the value of the collateral)? Arguably the debt is divided into secured and unsecured portions. But this again may depend on the way courts in your part of the country have been ruling in these situations.

The implications here are powerful:  you could have been the undisputed cause of a serious accident or be in the midst of complicated business litigation, with huge potential liability, and still qualify for Chapter 13 relief. The amount of damages just needs to be either contingent or unliquidated.  

A Final Point: Debt “On the Date of the Filing”

The relevant statute makes clear that the debt limits are based on what they were “on the date of the filing of the [bankruptcy] petition.” So events or court proceedings after the case filing should not matter.

If a debt was contingent when your bankruptcy case is filed but then becomes noncontingent because of the later occurrence of some event (in the above example, if your co-signed debt’s principal debtor stops paying on the debt), that debt should not count for Chapter 13 debt limit purposes.

Or if a debt was unliquidated when your case was filed but then becomes liquidated because of a later evidentiary court hearing, that debt should not count either.

 

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