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Chapter 13 Bankruptcy Debt Limits Increase April 1, 2010: Chapter 13 Debt Limits will go from $336,900 to $360,475 for liquidated, unsecured debt. For liquidated, secured debt, the limits will increase from $1,010,650 to $1,081,400.
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This is why you should care and why you want (if possible) to have your debts qualified as primarily non-consumer in Chapter 7:

1. You can avoid having to qualify under the Means Test. This is especially important for debtors whose income exceeds state median income for the size of their household.
2. If your debts are primarily non-consumer, Trustee, Creditors or US Trustee will not be able to request (successfully) dismissal for abuse under 11 U.S.C §707(b).

11 U.S.C §101(8) – defines “consumer debt” to mean “debt incurred by an individual primarily for personal, family or household purpose.”

Simple enough? Not really, not according to cases all over the place on the issue.

Issues to consider (because courts have):

-         What does primarily mean, total amount of debt or the number of debts?

-         Do you count mortgage in making the calculation?

-         What about debt in name of individual, incurred for business purposes?

-         What about deficiency judgments? What if 1099 is issued “excusing” the debt?

-         What about judgments and involuntary debts?

Calculating of claims has to be done in good faith and be reasonable

In re Reavis 2007 WL 2219519 (Bankr. N.D. Okla., July 30, 2007), held that Creditor is not permitted to manipulate the amount of claim in order to put debtor within parameters of §707(b). Likewise, I would infer from the holding that Debtor cannot manipulate debts in order to avoid §707(b) considerations.

While there is no case law to confirm my assumption, I think debt barred by statute of limitation or state law (such as anti-dificiency statute) cannot be considered in making the calculations whether debt is primarily consumer or not.

Determination of whether debt is primarily consumer should be based on dollar amount and not the number of debts in each category.

Majority rule: it is the aggregate amount of debt not the number of debts that should decide whether debts are primarily consumer or non-consumer.

See In re Hlavin, 394 B.R. 441 (Bankr. S.D. Ohio, Sept. 30, 2008); In re Booth, 858 F. 2d 1051 (5^th Cir. 1988).

Courts do consider mortgages, despite secured status, in determining whether debt is primarily consumer or not. However, mortgage on home is not automatically consumer, rather use of money should be examined. See In re Jones, 2009 WL 102442 (Bankr. E.D.N.C., Jan. 12, 2009).

See In re Hlavin, 394 B.R. 441, which holds that when Debtor’s concede that mortgage was used for consumer purposes, debt is considered consumer, despite secured status. This applies to debt secured by debtor’s home, not rental properties.

The Court in In re Burge, 377 B.R. (Bankr. N. D. Ohio, Oct. 3, 2007), held that debt arising from foreclosure on rental properties is not consumer debt. In other words, if mortgage secures rental property, I would argue that debt is primarily non-consumer.

However, consider that even debt on rental properties can be considered consumer, if on several occasions debtor represented to lender that property was to be occupied by debtor as her residence. See In re Coppi, 2008 WL 4224834 (Bankr. D. Neb., Sept. 10, 2008).

Unanswered issue: What about debts that are barred from collection through statute or state law?

This still leave unanswered the question re. whether deficiency judgment is in fact collectible. What if Creditor is barred from collecting on the debt, after issuance of 1099-C, can Debtor include that debt? No cases appear to clearly answer this question, but I would probably infer that you cannot include debt that is barred from collection in determining whether your debts are primarily non-consumer.

Most debts that are result of car accidents are non-consumer based on §101(8) definition of consumer debt.

Courts should examine the nature of debt, rather than qualification as personal or business debt.

In re Jones, 2009 WL 102442 (Bankr. E.D.N.C., Jan. 12, 2009) held that debts attributable to a failed business should be considered non-consumer, despite the fact that debts were in the debtors’ names rather than the business name.

In conclusion, while it is sometimes difficult to determine whether you are a consumer or non-consumer debtor, knowing that these issues are out there will at least give you the tools to ask your attorney the right questions.

1.      Bankruptcy petition – the bankruptcy documents, approximately 50+ pages, your attorney or you prepare and file with the court. These documents will list your assets, debts, income, expenses and financial history. You will have to sign these documents before they can be filed.

2.      Creditor’s meeting (aka 341(a) examination) – this is the initial (and in Chapter 7 only) meeting you will attend regarding your bankruptcy filing. At this meeting the Trustee will check your driver license and social security, review your documents, swear you in and ask you questions and determine if there are any assets that the trustee can sell for the benefit of creditors. This meeting does not take place in the courthouse. Note, most Chapter 7 debtors never set foot in the courthouse. Also, while creditors do have a right to attend the meeting and briefly question the debtor, they rarely attend such meetings despite the title.

3.      Trustee – in the Central District of California, Bankruptcy Trustees are either attorneys or CPAs that manage the bankruptcy case. They are sort of double agents. They work for the court and advise the court on the case, but mainly they work on behalf of all creditors and help them secure and recover any unprotected assets in the case. Trustees conduct Creditor’s meeting, not judges.

4.      Exemptions – these are laws that say that even if a debtor files for bankruptcy, he/she should be allowed to keep certain things in order to have a fresh start. Exemptions vary by state and different exemptions sets should be used for debtors depending on their individual situation. This is the reason most Chapter 7 debtors get to have all their debts excused, but still keep money in their checking account, still keep their house and car depending on the situation.

5.      Discharge – excuse of debt at conclusion of bankruptcy. The reason people file for bankruptcy. If debt is dischargeable, when case is completed, debt will be excused and you won’t have to repay it. If debt is non-dischargeable, then despite the filing of the bankruptcy case, you will have to find a way to repay this debt.

6.      Automatic Stay – when you file for bankruptcy, bankruptcy law mandates that all collection efforts against you must stop. Phone calls, foreclosures, wage garnishments, etc. Automatic Stay puts a freeze on the collection efforts and punishes those that don’t comply.

7.      Relief from the Automatic Stay – this is when a secured creditor asks the court’s permission to be excused from the Automatic Stay and be allowed to continue their repossession, foreclosure, etc. They need to have valid reason in order to petition the court, such as continued non-payments.

8.      Reaffirmation agreement – this is an agreement you may be asked to review or sign by the creditor. By signing this agreement, you basically put back together a contract to repay this creditor.  You are re-obligating yourself personally on the debt, despite the bankruptcy, which relieves you of the obligation. There are positives and negatives with respect to signing such agreement and you should consult a bankruptcy attorney for legal advice.

9.      Credit counseling/debtor education – under the new law debtors are required to take a course and obtain a certificate prior to filing for bankruptcy. A second course must be completed within 45 days of the creditor’s meeting and certificate filed with the court in order to obtain discharge. If the course is not taken prior to the filing, case will likely be dismissed.

10.  Means test – under the new law, chapter 7 debtors with mostly consumer (non-business) debts, must qualify based on their income, before they can file for chapter 7 bankruptcy. If you are below the median of your state’s income, you are likely to pass the means test without problems. If your income is above the median, further work may be required or you may have to file under a different bankruptcy chapter or explore other options.

Chapter 13 is this magic bankruptcy chapter that allows you to “strip” the second mortgage if it is fully unsecured and to cram down the mortgage on your second home. It is great, by the time you get out and successfully complete the plan in 3-5 years, you can get rid of a LOT of debt. There is one little catch. You can only do it if you meet the debt limitations. In California that may be harder to do than you think.

Under section 109(e) of the bankruptcy code, to be eligible for Chapter 13, debtor may not have more than: $336,900 in noncontingent, liquidated, unsecured debt;  and

$1,010,650 in noncontingent, liquidated, secured debt. Note, these debt limits are periodically increased.

That’s not a problem, you say. I only have about $90,000 on credit cards. I am way under the $336,900 limit. Oh wait. You want to count the second mortgage we will be stripping? That’s fine, too. I barely get in there, but I am ok. My second mortgage is only $230,000. What??? There is more? How much is my house worth now? Appraisal? You are going to count the unsecured portion of the first mortgage as well? We are going to have a problem…. Uh, we have a problem.

In re Groh, 2009 WL 1604974 (Bankr. S.D.Cal. 2009) and In re Estrada, Case No.: 09-00207 (Bankr.S.D.Cal) are the recent cases that came out holding that not only do you count the unsecured second mortgage to be stripped, but you also count the “unsecured” portion of the first mortgage, in addition to other debt you list on Schedule F (unsecured, non-priority debt, like credit cards and medical bills) to determine if you qualify under 109(e).

Here is a simple example. Client has a house worth $600,000. The first mortgage is $650,000 and the second mortgage is $200,000. Client has credit card and medical bills totaling $120,000.

We count: $120,000+$200,000=$320,000. Were we not required to include the unsecured portion of the first mortgage, Client would be ok to file for Chapter 13 (assuming other requirements are met). But, we add another $50,000 ($650,000 -$600,000) and now the unsecured debt, becomes $370,000.

Note: the same analysis applies if you have 2 properties. You are likely to run into a similar situation with 2 properties that are valued at less than the example, but as a result of combination, lead to same results.

What is the solution? There is no perfect solution.

1. You can try Chapter 11 (but it’s more expensive).
2. You can try to first do a Chapter 7 and get rid of the unsecured debts, but again that may make you ineligible for a Chapter 13 for a bit (or you may not qualify).
3. You can wait for property values to go up and reduce the unsecured portion. Downside is of course the uncertainty and the wait.