I meet with clients almost daily. During my free in-office bankruptcy consultation, I conduct an in-depth analysis of a client’s legal issues as it pertains to bankruptcy. Most often, a client will choose to file a chapter 7 bankruptcy, provided he or she meets the eligibility requirements for a chapter 7. If the circumstances warrant a chapter 13 bankruptcy filing, I will discuss with a client how a chapter 13 operates and, given the facts, how this chapter of bankruptcy may be the best option. But sometimes a client may not be eligible to file a chapter 13 bankruptcy, although this chapter may be the most preferable given a client’s particular set of facts. One reason a chapter 13 bankruptcy filing may not work is that a client may have too much debt. This post discusses the chapter 13 restriction of debt load in-depth.
A chapter 13 bankruptcy, or a “restructuring bankruptcy,” is a bankruptcy that lasts between 3 to 5 years, with monthly payments being made by the consumer for the benefit of creditors. A chapter 13 bankruptcy does have certain restrictions, however, particularly when it comes to how much debt a consumer can have to be eligible to file a chapter 13 bankruptcy. Currently, a consumer must have less than $360,475 in unsecured debts (not attached to collateral, such as medical bills, credit card bills, etc.) and less than $1,081,400 in secured debt (such as mortgages on a house, car loans, etc.). These numbers adjust periodically.
Most people who consider filing a chapter 13 bankruptcy fall below these total debt thresholds. But what if a consumer exceeds these thresholds? What options does he or she have?
I recently wrote a post on “Chapter 20” bankruptcy (chapter 7 + chapter 13) detailing one strategy to combat the debt ceiling. If a consumer’s debt is higher than the allowable thresholds for a chapter 13 bankruptcy, one option is to file a chapter 7 bankruptcy, eliminate the unsecured debt, and then file a chapter 13 bankruptcy on the heels of a chapter 7 bankruptcy. Often times, by eliminating the dischargeable unsecured debt first in a chapter 7 bankruptcy filing, this may qualify a consumer for a chapter 13 bankruptcy filing since the debt load may substantially decrease. Using a “Chapter 20” approach applies in a very narrow set of circumstances, though.
The other option we always consider before looking at a chapter 13 bankruptcy, is a chapter 7 bankruptcy filing. A chapter 7 bankruptcy will eliminate most debts and contains absolutely no debt ceiling. But to file a chapter 7 bankruptcy, certain eligibility requirements must be met first. For example, a consumer must not have filed a chapter 7 bankruptcy in the previous 8 years. The second eligibility criteria for a consumer is to be able to pass the chapter 7 bankruptcy “means test” which is based on income and household size. If a consumer’s income is too high based on household size he or she may be ineligible to file for a chapter 7 bankruptcy. Therefore, in some instances a consumer may not even qualify for a chapter 7 bankruptcy.
Now, what if a consumer is above the debt threshold of $360,475 in unsecured debt and/or $1,081,400 in secured debt, and he or she does not qualify for a chapter 13 bankruptcy? And what if that same consumer’s income is too high to be eligible for a chapter 7 bankruptcy? Where do you turn? Chapter 11 bankruptcy.
Chapter 11 bankruptcy is mainly for business reorganization, but can be a useful bankruptcy tool for some consumers who do not qualify for a chapter 7 bankruptcy because of too high of income and does not qualify for a chapter 13 because of too high of debt load. Chapter 11 is a very complicated form of bankruptcy. The situation that necessitates the need to file a chapter 11 bankruptcy for an individual consumer is rare.
If you are interested finding out more about bankruptcy, please call today to schedule your free in-office bankruptcy consultation in Eugene.