Overview Of Debt Limits In Chapter 13 Bankruptcy For Los Angeles County And Orange County Residents

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In this article, you will learn …

• The debt limits for filing for Chapter 13 Bankruptcy.
• The differences between secured vs. unsecured debts.
• Whether mortgage debt can be included in your bankruptcy filing.

Are There Debt Limits For Filing Chapter 13 Bankruptcy In California?

The debt limits in California are actually federal, meaning that they apply from coast to coast. The limits are an example of how Chapter 13 is a sort of mirror image of Chapter 7. If your income is too high in a way that can be made precise you cannot successfully file for Chapter 7 bankruptcy protection. However, there are no debt limits in Chapter 7. In theory you could discharge any amount of debt, no matter how large it is. In contrast, Chapter 13 has no income ceiling (though there is an income floor that is based on the three main requirements of a Chapter 13 plan); but there are two debt ceilings one for secured debts, the other for unsecured debts.

During the COVID emergency, the debt ceilings were temporarily consolidated into one large ceiling. However, when that change expired things reverted to the two debt ceilings. As of this writing, the unsecured debt is $465,275, and the secured debt ceiling is $1,395,875. These numbers change every three years because of inflation.

If you exceed either of these ceilings, you are ineligible for Chapter 13 protection. Then you should either consider Chapter 11 bankruptcy, or pay down some debts. 

In each case, the debts must be noncontingent (i.e., there is no future triggering event that is necessary to make the debt valid), and liquidated (i.e., the size and validity of the debt have already been established; for example, through a nonappealable judgment entered in a completed lawsuit).

The debt ceilings are determined on the day you file your Chapter 13 petition, so your eligibility will not change if, for example, an unliquidated debt becomes liquidated after you file the petition. 

Can Secured And Unsecured Debts Be Included In Chapter 13?

Including both secured and unsecured debts is not only an option, it is a requirement. If you fail to schedule all your debts, you will be guilty of perjury, which is an imprisonable offense.

Although you must list your secured debts in your bankruptcy schedules, in the Central District of California, you may be able to make payments on a secured debt directly to the creditor, rather than as a conduit payment through the Chapter 13 Trustee assigned to administer the plan payments your case. The benefit of direct payments is you don’t incur trustee fees. While trustee fees will not increase your plan payments if you have a less than a 100% plan, they will increase plan payments in a 100% plan.

However, payments on all unsecured debts must be conduit payments. And some unsecured debts, called unsecured priority debts, must be paid in full, even if the other unsecured creditors get chump change. Two types of priority debts that frequently come up are most tax debts and obligations to pay prepetition domestic support arrearages. If you want to see the complete list, look up 11 U.S.C. § 507(a).

What Are Secured Debts? What Are Unsecured Debts?

• Secured Debts

Secured debts are debts that are secured by collateral. If you fail to make the payments, the creditor can repossess the asset. Typical examples are car loans and home mortgages. If you fail to make the payments, the creditor can repossess the car, or foreclose on the home.

While the most common secured debts are secured by a tangible asset, such as a car or home, some secured debts owed by a business may be collateralized by a business’s revenue stream, or by an ongoing stream of merchandise the business receives from its vendors and then sells.

• Unsecured Debts

Unsecured debts are defined as debts that have no collateral behind them. There is nothing the creditor can repossess in the event of a payment default. For example, in the event of a default the bank cannot repossess a TV you purchase with your credit card. However, the creditor is not without recourse. If it successfully sues you, it can enlist the Sheriff to garnish your wages, levy money from your bank accounts, and record liens against your assets. 

Medical bills and student loans are also unsecured debts. A hospital cannot repossess your heart after a transplant (maybe a kidney, but certainly not the heart). A student loan lender cannot repossess the knowledge you received (lobotomies stopped in the 1950s). However, as with the credit card issuer, the creditor can garnish wages, levy bank accounts, and record liens against assets.

In bankruptcy, unsecured debts receive less favorable treatment than secured debts because secured creditors are entitled to special rights attached to the collateral. However, as previously stated, priority unsecured debts get better treatment than nonpriority debt. Priority debts must be paid in full through the Chapter 13 plan, regardless of the payout percentage to nonpriority debts.

One common source of confusion is the difference between priority debts and nondischargeable debts. Priority debts must be paid in full through the plan. However, while nonpriority debts need not be paid in full over the life of the plan, if they are nondischargeable, you will still owe the unpaid portion after you receive a discharge. The quintessential example is student loans. Although student loans are nondischargeable, they are not priority debts.

Are Mortgage Debts Included In Applying The Chapter 13 Debt Limits?

Mortgages are secured debts, and are included in the sum of all secured debts when applying the secured debt ceiling, which is currently $1,395,875. If the sum of your secured debts is greater than the ceiling, you ineligible for Chapter 13 bankruptcy protection. 

How Can You Assist Clients Who Are Close To The Debt Ceilings And Worry That They Will Not Qualify For Chapter 13 Bankruptcy?

If you exceed either debt ceiling, then either pay down the debt to below the ceiling, or else consider filing for Chapter 11 protection. However, you choose to pay down the debts, you may have to wait before filing a Chapter 13 petition because of a concept called preference. To understand this concept, it helps to keep in mind the two big goals of bankruptcy law.

The first big goal of bankruptcy law is to give you a fresh financial start. This goal has a laudable pedigree that goes back to the Code of Hammurabi, developed by Hammurabi, a king in the first Babylonian empire. It is explicitly commanded in the Law of Moses (Deut. 15:1-2). The ancient Romans had a well-developed bankruptcy law the was established by Julius Caesar as a way to deal with his debts. It probably played a role in his assassination on March 15, 44 BC, when all the senators (except for Marc Anthony), who were also his creditors, stabbed him to death on the Forum. And is one of the powers of Congress enumerated in article 1 of the U.S. Constitution.

The second big goal of bankruptcy law is to ensure that all similarly situated creditors are treated equally and fairly. (Remember: All debts are not treated the same. See the discussion above about the differences between secured and unsecured debts, and between priority and nonpriority debts.)

There are two ways that debtors sometimes violate this second big goal. First, they won’t list all their creditors. As I mentioned earlier, failure to list all your creditors in your petition is a form of perjury, for which you can be imprisoned. Silver lining: It will be in a federal penitentiary. I have been assured by former clients who spent years in penitentiaries prior to becoming my clients, that the food is better in federal penitentiaries than in state penitentiaries.

Second, debtors will sometimes make payments to a creditor in anticipation of bankruptcy; perhaps to curry favor with the creditor, or because the creditor is a family member. In other words, they prefer the paid creditor above other similarly situated creditors. That sort of payment is called a preference. 

In a Chapter 7 bankruptcy, the Chapter 7 Trustee assigned to the case will undo the payments and seize the money for distribution to all the creditors. In a Chapter 13, the amount of the preference is one of the factors that goes into determining the amount you pay to your creditors over the life of the Chapter 13 plan.

The solution: Wait to file until the look back period for preference avoidance has expired. Or consider filing a Chapter 11, which has no debt ceilings.

What Options Exist If I Am Discouraged By Chapter 13 Limitations But Still Need Financial Relief?

You can pay the debt in full. However, if you are considering bankruptcy, that’s probably not an option.

You can attempt to negotiate with creditors. However, if you have many creditors, that will undoubtedly be more work than it’s worth; especially if you have significant assets that can be mortgages or liquidated. You may also face the free rider problem: each creditor wants to be paid in full, and let the other creditors take the bath.

You can consider Chapter 11. The drawback: it’s much more complicated than Chapter 13, and concomitantly more expensive.

Still Seeking Assistance? Ready To Get Started?

If you need further guidance in Debt Limits In Chapter 13 Bankruptcy, a free initial consultation is your best next step. Get the information and legal answers you want by calling (562) 777-9159 today.