It seems counterintuitive that there are actually debt limits involved in the bankruptcy process when the bankruptcy system itself was designed to relieve those overwhelmed by debt. For those with only a preliminary knowledge of the bankruptcy system, it may seem even more confusing to learn that the debt limits apply to petitions for Chapter 13 bankruptcy, in which the debtor agrees he can and should pay a portion of his restructured debts over a fixed repayment period. In order to understand this seeming discrepancy, it is important to distinguish between the different types of individual bankruptcy and the means by which the court decides the type a debtor qualifies for. The Bankruptcy Abuse Prevention and Consumer Protection Act of 20051 changed the qualifications for individual bankruptcy and provided for the conversion of a Chapter 7 liquidation petition into a Chapter 13 wage-earner’s plan if it appeared the debtor could afford to make limited payments on his debts. While agreeing to a repayment plan was optional prior to the 2005 amendments, courts, debtors, and creditors alike generally prefer petitioning under Chapter 13 because it often allows debtors to keep their homes and creditors to recoup a portion of their anticipated losses. However, even if all parties are amicable to the Chapter 13 process, for some burdened by fixed levels of secured and unsecured debts, Chapter 7 liquidation may be their only option.
Understanding Individual Bankruptcy Options
If you are an individual debtor considering your bankruptcy options, you are generally limited to filing a bankruptcy petition under either Chapter 7 or Chapter 13 of the bankruptcy code. Chapter 13 bankruptcy, also referred to as a “wage earner’s plan,”2 does not require a complete liquidation and distribution of your non-exempt assets. Instead, you may qualify to declare Chapter 13 bankruptcy if you are a wage earner, i.e., have a job or steady source of income, with anticipated revenue enough to make payments on your consolidated debts over a three to five year period. The higher your income, the longer you will be expected to remain on a payment plan prior to discharge of your remaining non-exempt debts. Chapter 13 bankruptcy is preferable to some debtors as it provides the following benefits:
- Debtors are often eligible to save their homes from foreclosure, unlike during a Chapter 7 liquidation proceeding;
- Chapter 13 Bankruptcy serves to protect you from having contact with harassing creditors, who will receive payment only through a bankruptcy trustee appointed by the court;
- Chapter 13 proceedings generally protect third party co-signers from liability on certain consumer debts;
- Your outstanding debts are consolidated for ease of payment and administration, and you will typically make only a single payment to your bankruptcy trustee; and
- With certain limited exceptions, if you abide by the terms of your Chapter 13 payment plan, the court will generally order a discharge of your remaining debts following your payment period.
If, however, you violate the terms of your Chapter 13 plan or otherwise do not qualify for bankruptcy under Chapter 13, the Court may convert your case to a liquidation case under Chapter 7 of the bankruptcy code, also known as Chapter 7 bankruptcy.
In contrast to Chapter 13 bankruptcy, Chapter 7 bankruptcy3 is a complete liquidation, i.e., sale, of your nonexempt assets, often including your home. This is especially true on Long Island, where home prices seldom meet New York’s maximum $165,000.00 homestead exemption. Once your assets are liquidated, the money is then distributed in priority order to your creditors, and yours debts are generally discharged thereafter. There is no payment plan associated with Chapter 7 bankruptcy as with Chapter 13 bankruptcy, which is why petitioners with limited income and assets may elect to file for Chapter 7 bankruptcy and take advantage of specific New York asset exemptions,4 such as the homestead exemption and protection of additional assets including sentimental belongings, pets, child support, and limited items necessary for daily living. Chapter 7 bankruptcy, however, is truly a fresh start, and although a qualified Long Island bankruptcy attorney can help you take advantage of your maximum assets exemptions if you are ready to begin anew, this is seldom the best option for families. If you’ve found yourself with insurmountable debt, whether as the result of a medical emergency or predatory lending practices, but do not wish to upend your family, then Chapter 13 might be the preferable option for working individuals. However, if your debts are too high, then you may not initially qualify.
Secured and Unsecured Debt Limitations under Chapter 13
In order to be eligible to file for Chapter 13 bankruptcy, your “unsecured” debts must be less than $394,725.00, and your “secured” debts must be less than $1,184,200.00. An “unsecured debt”5 is defined as a debt that does not give your creditor the right to take possession of either your real (home/land) or personal property (vehicle/furniture) if you default on your payments. Examples of common unsecured debts, include, but are not limited to, the following:
- Credit card debt;
- Private student loans or personal loans;
- Medical debt;
- Utility bills; or
- Business loans.
Since unsecured debt by its very nature leaves the lender with fewer options for collection and less protection upon default, interest rates on unsecured debts are generally inflated. Many debtors are shocked to learn, therefore, that what began as an unsecured student loan with a principle of $150,000.00 can, coupled with default fees, swell to above the unsecured debt threshold due to high interest rates and compounding interest. However, you are not subject to repossession of property if you default on an unsecured debt, which is the very nature of it being “unsecured”. Secured debts include, but are not limited to:
- Your mortgage;
- Car loans;
- Certain furniture financing debt; and
- Private loans by which you agreed to put up property as collateral.
If you default on a secured debt, the lender typically has the right to either repossess or foreclosed on the property that secures the debt. Because New York is a judicial foreclosure state,6 however, your lender cannot foreclose on your home without a court order, and if you declare bankruptcy, any foreclosure proceeding will automatically be stayed until your petition is evaluated.
Defeating Chapter 13 Debt Limitations
Bankruptcy experts have engaged in recent discussions7 about the relevance of Chapter 13 debt limitations, which were first imposed in the 1970s to prevent real estate developers from taking advantage of the Chapter 13 system. In areas such as Nassau and Suffolk counties, where it is well within norm to have a single mortgage above the 1.2 million dollar secured debt threshold, the debt limits were never intended to prevent such debtors from taking advantage of the wage-earner’s system. As such, it is imperative to speak with a New York individual bankruptcy attorney who can analyze the nature of your debt to determine which debts do not count towards your debt threshold. These debts include, but are not limited to, the following:
- Contingent debts, i.e., those that have not yet been triggered because a qualifying event, such as a business liquidation, has not occurred;
- Liquidated debts, which are debts in which the amount owed has yet to be determined, such as if a personal injury case pending against you after a car accident and Certain breach of contract debts.
Further, if you are at or close to the secured or unsecured threshold, a Long Island bankruptcy attorney may be able to work with your lenders to convert your debt. For example, if you have a mortgage of 1.3 million dollars but very little unsecured debt, in order to avoid having to move forward with the lengthy and drawn out Chapter 7 process, your bank may agree to convert $200,000 worth of your debt into unsecured debt, putting you below the Chapter 13 debt thresholds.
Contact an Experienced Long Island Bankruptcy Attorney Today to Discuss Your Options
If you are suffering under the burden of your debt, Ronald D. Weiss, P.C., Attorney at Law can help to ensure you are taking advantage of the bankruptcy proceeding that is right for you and your family. Ronald D. Weiss, P.C., Attorney at Law is your premier bankruptcy attorney on Long Island, serving both Nassau and Suffolk County residents. He can analyze the specific facts of your case, review your debts, and help you meet Chapter 13 thresholds. Contact us online or at 631-479-2455 today for a no-risk consultation.