In a Chapter 13 bankruptcy, also known as a wage earner’s plan, individual debtors may be permitted to retain their property, and develop a plan to repay a portion or all of their debts. A debtor will propose a repayment plan to make installment payments to creditors over a 36 to 60 month period.
A creditor of a chapter 13 debtor may not pursue collection efforts after the bankruptcy petition is filed, and during the pendency of the plan. This therefore means that a creditor will need to wait years to be repaid, and the plan may not even provide for full payment of the creditor’s claim.
What is a creditor to do in such a situation? One little known fact of a Chapter 13 case is that, under 11 U.S.C. § 109(e), a debtor may not have more than $419,275 in unsecured, liquidated, noncontingent debt (updated yearly to reflect changes in the consumer price index). Similarly, a debtor’s secured debt may not exceed $1,257,850. You read that right: too much of these types of debt can disqualify a debtor from filing a Chapter 13 bankruptcy petition.
The Section 109(e) debt limit is often overlooked by trustees, creditors, and even debtors themselves. A quick review of a debtor’s schedules will determine whether the debt limit has been exceeded. If so, a creditor can move to dismiss the Chapter 13 bankruptcy case. The debtor may then be given the option to convert the bankruptcy case to one under Chapter 7 or Chapter 11, each of which may be disadvantageous from the debtor’s perspective.
For example, unlike in a Chapter 13 case, the debtor’s assets may be liquidated in order to repay creditors in a Chapter 7 case. Moreover, the debtor will be subject to the Chapter 7 Means Test Calculation, and will be required to complete Official Form 122A-1 and 122A-2. If, for example, the debtor’s income (or contributions received from a spouse) is too high and creates a presumption of abuse, the debtor may fail the Means Test and the Chapter 7 case may be dismissed.
Therefore, it is important for any creditor in a Chapter 13 case to consult with a bankruptcy attorney to carefully consider whether the debtor has exceeded the debt limit under Section 109(e) of the Bankruptcy Code at the onset of the Chapter 13 case.
Carl D. Neff is a partner with the law firm of FisherBroyles, LLP, and practices in Delaware. You can reach Carl at (302) 482-4244 or at Carl.Neff@FisherBroyles.com.