Debt Limits in Chapter 13 Bankruptcy

Chapter 13 bankruptcy is limited to individual filers, and is essentially a streamlined version of chapter 11 bankruptcy, which is mostly reserved for businesses, though individuals may file under chapter 11 as well. “Individuals” even includes self-employed individuals and those operating unincorporated businesses. Chapter 13 allows an individual with a modest amount of debt to seek reorganization. However, eligibility in chapter 13 depends on the debtor’s total secured and unsecured debt.

Debt limits for chapter 13 are determined by statute, and can be found under section 109(e) of Title 11 of the United States Code. The amounts increase every ten years to account for inflation. As of April 1, 2010, the maximum amount of secured debt a debtor can have to file under chapter 13 is $1,081,400.00, and the maximum amount of unsecured debt is $360,475.00. If the individual’s debt exceeds either amount, he may be forced into a chapter 11.

In the past, there has been dispute as to whether composition of these amounts depends on under which Schedule, D, E, or F, the debt is listed, but the common rule is that “secured” debts are calculated based on the value of the underlying collateral. For example, if the debtor owes $500,000.00 on a house worth $525,000.00, he would schedule $500,000.00 of secured debt on Schedule D. If instead the house was only worth $400,000.00, he would still list the loan as a $500,000.00 secured debt on Schedule D, but because the loan is under-secured, $100,000.00 would be treated as unsecured debt, and would go toward the unsecured debt limit. Likewise, once-secured debts that have been sold out due to foreclosure by a senior mortagee will be treated as pure unsecured debt. Finally, priority unsecured debts, most commonly debts owed to the government, must be factored into the debtor’s overall unsecured debt.

One final thing to mention is that the total debt calculated for purposes of chapter 13 eligibility occurs initially with what the debtor has scheduled, though once the deadline for creditors to file proofs of claim passes, the determination is based on the total amount of all claims filed. Thus, if the debtor schedules exactly one unsecured debt in the amount of $350,000.00, but later receives a proof of claim from the creditor in the amount of $375,000.00, he becomes ineligible to proceed under chapter 13. Even though he was eligible when he filed, the proof of claim filed by the creditor pushes the debtor over the unsecured limit (assuming the amount claimed is accurate).

So what happens if the debtor is ineligible for a chapter 13? He may either seek to file under chapter 7 or chapter 11, neither of which has debt limits, though chapter 7 may be unavailable to the debtor due to income requirements and furthermore lacks several mechanisms available in chapter 13. On the other hand, chapter 11 is much more complicated and expensive, but offers nearly the same options as a chapter 13, plus a plethora of others.