What Should You Do If You’re Over the Chapter 13 Debt Limit and Looking to File for Bankruptcy?

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Did you know that you are ineligible to file for Chapter 13 bankruptcy if your debts exceed a specific amount? In other words, it’s possible to be over the Chapter 13 debt limit. If you currently have too much debt, you don’t have to panic just yet. Some debtors can exclude certain debts from the total debt calculation or use other strategies to lower debt within Chapter 13 limits.

Are You Over the Chapter 13 Debt Limit?

Currently, you are ineligible to file for Chapter 13 bankruptcy if your total non-contingent, liquidated debts are over:

  • $1,184,200 of secured debts (mortgages, liens, etc.)
  • $394,725 of unsecured debts (credit cards, medical bills, etc.)

If you do have debt over those amounts, you should take a look at exemptions to debt limits and different legal strategies to divide up your debt to meet the maximums.

What Debts Don’t Count?

First, you need to consider contingent and unliquidated debts. Contingent debts are those that you are not required to pay unless a contingency occurs. These debts might never be collected if the event does not occur. Co-signed debts are not always contingent, as you do have a legal responsibility to pay in the event that the other party cannot. Unliquidated debts are those where it is not clear whether or not you are responsible to pay or how much needs to be paid. Most frequently, unliquidated debts include accident, personal injury and breach of contract claims.

Decreasing Secured Debt and Increasing Unsecured Debt

Another strategy to prevent being over the Chapter 13 debt limit is decreasing the amount of secured debt that you have and increasing unsecured debt. Lien stripping is a technique unique to Chapter 13 bankruptcies that can eliminate second or third mortgages from your real estate properties. If your home is worth less than the total balance of the oldest mortgage, you can “strip” the junior mortgages. That will make the junior mortgages “wholly unsecured,” which means that they will no longer count towards the total of secured debt. Stripped liens will get the same treatment as other types of unsecured debt.

If Your Debt Is Still Too High

If none of the above strategies work, you might need to consider a “Chapter 20” bankruptcy. This is a two-part strategy that involves first filing for Chapter 7 bankruptcy to remove any unsecured debts and then filing for Chapter 13 bankruptcy. Remember that you will be ineligible for a discharge at the end of the Chapter 13 case because there was just a Chapter 7 discharge granted. The primary advantage of this strategy is that it increases the amount of time you have to catch up on payments for secured debt and nondischargable debts and that it could allow you to remove liens.

Chapter 11 bankruptcy can also be used for individuals over the debt limit. While it is most frequently used by businesses, there is no debt limit for Chapter 11, so individuals can utilize it to restructure and pay back unsecured debt in a fashion similar to Chapter 13 bankruptcy.

Choose an Experienced Bankruptcy Attorney if You’re Over the Chapter 13 Debt Limit

Steiner Law Group has years of experience working with business owners, entrepreneurs, professionals and families to safeguard assets and secure a better future. To learn more about how you can protect your assets, contact us today by calling (410) 670-7060.

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About Eric Steiner, Esquire

Mr. Steiner graduated from the University of Michigan Law School in 2006. Since then, he has focused his practice on bankruptcy, real estate, commercial and consumer collections, including representing the third largest lender in the greater Baltimore area.