Chapter 13 Debt Limits Should be Raised or Eliminated, Some Say

By Daniel Gill

Jurists and practitioners are calling for adjustment or elimination of the debt limit for an individual to qualify to file a Chapter 13 bankruptcy.

Judge Paul W. Bonapfel of the U.S. Bankruptcy Court for the Northern District of Georgia, speaking at a meeting Oct. 10 of the American Bankruptcy Institute Commission on Consumer Bankruptcy, was one proponent. Several practitioners have told Bloomberg Law they agree.

A change in these laws could significantly affect individuals who would otherwise file bankruptcy, but for whom the alternative to a Chapter 13—Chapter 11—is too burdensome and expensive to be a realistic option, they say.

In Chapter 13, individuals receiving regular income can obtain debt relief while retaining their property. To do so, the debtor must propose a plan that uses future income to repay all or a portion of the debt over a three- to five-year period.

But under the current laws, individuals with secured debt greater than $1,149,525 or unsecured debt greater than $383,175 don’t qualify for Chapter 13.

“Provisions that limit Chapter 13 relief based on the amount of the debtor’s secured and unsecured debts have outlived their usefulness,” Bonapfel wrote in prepared remarks submitted to the ABI commission.

Debt limits to qualify for Chapter 13 originated with the Bankruptcy Code enacted in 1978. At the time, legislators were concerned that certain debtors, like real estate developers with multiple properties, would use Chapter 13 to avoid filing Chapter 11, a far more complex and expensive system, John Rao told Bloomberg Law. Rao is an attorney with the National Consumer Law Center, based in Boston.

But the issues and economics of many debtors over the debt limit don’t support the procedural complexity and expense that comes with filing a Chapter 11, Cathy Moran told Bloomberg Law. Moran is a certified bankruptcy specialist practicing in Mountain View, Calif. with more than 38 years experience.

Chapter 13 moves swiftly, and there are safeguards for creditors, she said.

The debt limits are too low for certain parts of the country, especially where real estate values are extremely high, Rao said. Bonapfel and Moran agreed. In expensive real estate markets, it’s not at all surprising to find a debtor with a mortgage more than $1.2 million, they said.

In today’s economy, it’s really easy to bump up against these relatively low debt limits, Joseph Michelotti told Bloomberg Law. Michelotti is a consumer bankruptcy attorney practicing in Oak Brook, Ill., for 38 years.

“They don’t serve any legitimate purpose; they’re arbitrary limits,” Michelotti said. And Chapter 11 is not a great option for those whose debts are too high to qualify for Chapter 13: “It’s very rare for an individual to come out of Chapter 11 successfully,” he said.

Some, like Bonapfel, have suggested that it might be appropriate to extend plan payment periods for debtors pushing the outer range of debt. But Moran rejects that notion, saying that a longer plan period would be poorly accepted by the debtor community.

“It’s time for Congress to take a look at this and make Chapter 13 more accessible,” Michelotti said.

Bloomberg Law found no support for the debt limits as they currently stand.

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