Strategies to Meet the Chapter 13 Bankruptcy Debt Limits
If it looks like your debts exceed the Chapter 13 debt limits, you still might be able to file for Chapter 13.
You are not eligible to file for Chapter 13 bankruptcy if your debts exceed a certain amount. That is, if you have too much debt, you can't use Chapter 13. But, if upon first glance, it appears that your debts exceed the limit, take a closer look. You may be able to exclude certain debts from the calculation or use other strategies that will bring your debts below the limits.
What Are the Chapter 13 Debt Limits?
You are not eligible to file for Chapter 13 bankruptcy if the total of your non-contingent, liquidated debts (these terms are explained below) exceed the limits set by the bankruptcy law. The limit amounts change every three years. As of April 1, 2016, if your secured debts (mortgages and liens) add up to more that $1,184,200, or your unsecured debts add up to more than $394,725, Chapter 13 may not be available to you. (To learn more about Chapter 13 debt limits, see Are You Eligible for Chapter 13 Bankruptcy?)
If it seems like your debts are too high, you might still qualify for Chapter 13. Here's why:
- Your debts might not be below the limits.
- You might be able to use strategies to get your debts below the Chapter 13 limits.
Review and Categorize Your Debts
Take the time to carefully review and categorize your debts. You may find that:
- some of your debts do not count toward the debt limits, or
- you may be able to divide certain secured debts into secured and unsecured portions -- thus increasing your unsecured debt and decreasing your secured debt.
Determine Which Debts Do Not Count Towards the Debt Limit
You must list contingent and unliquidated debts in your bankruptcy papers but they do not count toward the debt limits.
Contingent debts. These are debts that you have no obligation to pay unless a specific event, called a “contingency," occurs. Most often, these are personal guarantees that you don't have to pay unless someone else, often a business, defaults. If the contingency event hasn’t happened, the debt does not count toward the debt limits.
You might think that cosigned debts are contingent (for example, you agree to cosign on your brother's car loan with the understanding that he'll pay the debt), but that's usually not the case. Even if you have an agreement with the other person that you will not have to repay the debt, legally you are equally responsible.
Unliquidated debts. These are debts where your responsibility to pay has not been determined, or where the amount cannot be readily determined. This category often includes accident and other personal injury claims.
Breach of contract claims, where the contract is for the payment of money and the amount can be easily calculated, may not qualify as unliquidated.
Divide Debts into Secured and Unsecured Portions
With lien stripping and cramdown you remove a lien, or part of a lien, from secured property in bankruptcy. The portion of the removed lien is converted to unsecured debt. (To learn more see What Is Lien Stripping in Chapter 13 Bankruptcy? and Cramdown in Chapter 13 Bankruptcy: The Basics)
In this way, you increase your unsecured debt amount, but decrease your secured debt amount. This might help you stay under the debt limits.
If You Still Don’t Qualify: Consider A Chapter 20 Bankruptcy
Chapter 20 bankruptcy is a two-step strategy to deal with your debts in the bankruptcy court. It can help if you really need a Chapter 13 (for example, perhaps you want to keep your home or car and need Chapter 13 to catch up on back payments, or maybe you have debts that will be wiped out in Chapter 13, but not Chapter 7) but your debts are too high to qualify.
Here's how Chapter 20 bankruptcy works:
First you file for Chapter 7 bankruptcy (this assumes, of course, that you can pass the Chapter 7 means test and meet other eligibility criteria for Chapter 7). In that Chapter 7, you wipe out unsecured debts (assuming they are eligible for discharge). Reducing your unsecured debt load may then allow you to meet the Chapter 13 debt limits. If so, you then file for Chapter 13. (For more information on Chapter 20, see What Is Chapter 20 Bankruptcy?)
Keep in mind, that you won't be able to get a discharge at the end of your Chapter 13 case because you just got one in the Chapter 7. However, the Chapter 13:
- gives you additional time (the length of your repayment plan) to catch up on secured debt or nondischargeable debt that you can’t afford to pay all at once, and
- may allow you to cram down or strip off liens. (Your ability to do this in a Chapter 13 varies by district -- check with an experienced bankruptcy attorney in your area.)
Special Strategies for Married Debtors
Married couples who need to file for bankruptcy can use additional strategies if it looks like their debts may exceed the Chapter 13 debt limits.
Spouses Can File Under Different Chapters
If one spouse’s debt puts both over the limit for a joint filing, you might get around the debt limits by having one spouse file for Chapter 7 bankruptcy and the other file for Chapter 13 bankruptcy. Here's how it might work:
Carlos and Evelyn fell behind on their mortgage and want to use Chapter 13 to bring it current, but Evelyn has unsecured debt from a failed business that puts them over the debt limit. Carlos is not obligated on Evelyn's business debt but he has a business of his own to protect. Evelyn files a Chapter 7 and Carlos files a Chapter 13. Evelyn's business debt is discharged in her Chapter 7 and the mortgage is brought current through Carlos' Chapter 13 repayment plan.
This requires a sophisticated legal analysis if
- you have assets that are not protected by exemptions
- you live in a community property state
- you are claiming ownership of property as tenants by the entirety, or
- you are planning to use lien stripping or cram down.
Check with an experienced bankruptcy attorney in your area to make sure you are fully aware of any consequences. (To learn more about community property in bankruptcy, see Filing for Bankruptcy Without Your Spouse: What Happens to Debts & Property? For more on tenancy by the entireties, see What Happens to Property Owned as Tenancy by the Entireties in Bankruptcy?)
Claim Expanded Debt Limits in Joint Cases
If you are a married couple filing a joint Chapter 13 bankruptcy, some courts will expand the debt limits. Others, however, won't allow for any expansion. Check with an experienced bankruptcy attorney in your area to find out what the judges in your district allow.
If your court is more flexible on the debt limits when it comes to joint Chapter 13 bankruptcies, this is likely how it will work: If you each qualify for Chapter 13 separately, the court will allow the Chapter 13 case to proceed (even if your debts taken together are above the limits).
This does not mean that you have to file two cases, but it does mean that each spouse must have a source of income that could support a Chapter 13 plan and each spouse's debts, individually, must not exceed the Chapter 13 debt limits. To determine the amount of debt, each spouse must include joint debt in its full amount along with that spouse’s individual debt.
Jane and Michael, a married couple, have a total of $420,000 in unsecured debt. This exceeds the $383,175 unsecured debt limit for Chapter 13. They both work and have secured debt under the limit. They are jointly obligated on $200,000 in unsecured debt from a failed business. Michael has another $180,000 in unsecured medical debt and Jane has $40,000 in unsecured credit card debt.
Since each would qualify for Chapter 13 individually (Michael with a total of $380,000 in unsecured debt and Jane with a total of $240,000 in unsecured debt), they may qualify to file a joint Chapter 13 bankruptcy even though they have $420,000 of unsecured debt together.