Chapter 13 bankruptcy is a special kind of bankruptcy. Unlike the simple and quick chapter 7, chapter 13 has a set of different and more complicated rules to go along with it. Those who file for chapter 13 often have different goals from chapter 7 filers. A home foreclosure is often in the mix, or possibly a car repossession. Sometimes a huge tax bill is looming. Chapter 13 can protect people from these kinds of creditors and can get them up to five years to catch up or repay some or all of their debts. Again, how much gets paid depends on those complicated rules. An experienced bankruptcy attorney can run the numbers for you and give you more details.
Although chapter 13 is a very versatile tool, Congress decided that they wanted to limit who was allowed to file for chapter 13. They puts some caps on the amount of debt allowed, and set out what type of persons can file. I know those caps served a purpose at some point. The problem is that with the rising cost of living and the larger debt load carried by so many people in the recession, it’s not too difficult to find yourself over the caps and disqualified from bankruptcy.
Right now, the cap for secured debt (debt with collateral like a house or a car) is about $1.08 million. The cap for unsecured debt is about $380,000. For most “consumers” (regular folks who draw a paycheck and work for someone else, these caps are usually not a problem. For small business owners, however, these numbers can cause some problems. A good bankruptcy lawyer can help you figure out if you are bumping up against those caps and might need to consider chapter 11 instead.
There are a couple things to keep in mind about the chapter 13 caps. First, real property that is underwater might be split into a secured part and an unsecured part if the value of the property is less than the amounts of the loans against it. For instance, if you owe $600,000 on your house, but it’s only worth $420,000, the bankruptcy court might look at the debt as $420,000 of secured debt and $180,000 of unsecured debt. If you’re a small business owner and have a couple hundred thousand dollars of unsecured business debt, you could have a problem. Again, an experienced bankruptcy attorney can help you figure this out.
Another thing to understand is that “disputed” or “unliquidated” debt is not counted in the unsecured and secured totals. A disputed debt is one that you say you don’t owe. Say you’re involved in a car accident and it’s not clear who’s at fault. Even though you may have been sued by the other driver, that debt is still disputed because you may or may not owe it. Unliquidated debt is debt that you can’t readily attach an amount to right now. Even if you were clearly responsible for that car accident, you don’t know exactly how much the damages are going to be until a judge or a jury decides. That means it’s unliquidated and doesn’t count in the total for purposes of qualifying for chapter 13.
A final thing to keep in mind about chapter 13 is that the person filing for chapter 13 must be employed or have “regular income.” “Regular income” is kind of a wishy-washy term, but it is clear that “no income” is not “regular income.” So if you have no income, you won’t be able to stay in a chapter 13. With no income, chapter 7 might be a better choice or indeed the only option.
Alameda bankruptcy attorney James Pixton careful analyzes his clients’ numbers to make sure they can file the bankruptcy case that is best for them. Call (510) 451-6200 to make an appointment or email him at james@pixlaw.com.
