SQUEEZING INTO CHAPTER 13 DEBT LIMITS

Section 109 (e) of the Bankruptcy code states that, “Only an individual with regular income that owes, on the date of the filing of the petition, non-contingent, liquidated, unsecured debts of less than $336,900 and non-contingent, liquidated, secured debts of less than $1,010,650.” On the other hand, Section 104 (a) provides for an adjustment on April 1, 1998, and at each 3-year interval ending on April 1 thereafter. The adjustment amount is based on the change in the consumer price index published by the Department of Labor for the most recent 3 year period ending immediately before January 1 proceeding such April 1, and to round to the nearest $25 the dollar amount that represents such change. The original debt limits for Chapter 13 set in 1994 were $750,000 for secured debt, and $250,000 for unsecured debt. Since that time it has increased on April 1st every 3 years. The last adjustment happened on April 1, 2010 setting the current secured debt limit at $1,081,500, and the unsecured debt limit at $360,525.

 These debt limits qualify which debtors are eligible for Chapter 13 relief. Chapter 7 has no debt limits. To illustrate how Chapter 13 debt limits work imagine that you are the debtor seeking relief from debt. You own a house with a mortgage owing $950,000, 2 car loans owing $50,000, credit card debts owing $250,000, medical bills of $50,000. Can you file for Chapter 13 to reorganize your financial affairs? Yes, because your secured debt is less than $1,081,500 and your unsecured debt is less than $360,525. But what if you signed a personal guaranty for $1.0 million in favor of the landlord of Obama who is still current on his lease and landlord has filed a lawsuit against you to collect on the personal guaranty? Are you still within the debt limits? Yes, because the personal guaranty is a contingent liability and liability has not yet arisen because Obama is still current on his lease. What if the lawsuit was filed after Obama defaulted on his lease agreement? The answer is NO. You no longer qualify for Chapter 13 because your liability for the personal guaranty has ceased to be a contingent liability because Obama’s default on the lease has triggered your personal guaranty liability. Hence, your unsecured liquidated and non contingent debt would be over a million dollars which is way beyond $360,525.

Liquidated debt means that the amount owed is easily known or determined. In the Obama example, the amount you owe on the lease agreement because of your personal guaranty is easily known. If there is one year left on the lease and Obama has defaulted for 3 months, you will owe 3 months of default plus one year of rent. On the other hand, if you are sued by Obama because you had an affair with Michelle and ran away with her to Hawaii for 2 months, the amount you will owe Obama for this indiscretion for damages is not easily determined. Hence, this kind of lawsuit where the amount of damages cannot be easily ascertained will not push you out of Chapter 13.

A non-contingent debt is definitely owed; whereas a contingent debt may or may not be owed depending on some other event happening which is necessary to fix liability. The Obama lawsuit against you is contingent because there has to be a court judgment favoring Obama as plaintiff which may not happen because you may be able to successfully defend yourself against the lawsuit. Hence, to fix liability against you, an event must happen first and that is Obama must get the court judgment against you.

What happens when you surrender property with secured debt after the Chapter 13 case is filed? Can you deduct the amount of debt for the property after surrender to squeeze you into the debt limits? The answer is NO because you determine the amount of debt as of the date of filing of the petition not to post-petition events (In re Hinds S.D. Fla. 2010).

Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin and Fujien and looks forward to discussing your case with you personally. Please call (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.