You can have only certain maximum amounts of secured and unsecured debts in order to qualify for Chapter 13, but most people have much less.
The Purpose of Chapter 13 Debt Limits
Chapter 7 “straight bankruptcy” has no debt limits, no maximum amount of debt to be able to file that type of bankruptcy. But the Bankruptcy Code does impose a limit on the amount of debt a person can owe when filing a Chapter 13 case.
Why is that? Chapter 7 has no debt limits because it is designed to be used in a wide variety of business and consumer situations, including by corporations and business partnerships, some of which have many millions of dollars of debt. There is no reason to have a limit in the amount of debt the person or business owes when doing this “liquidating” kind of bankruptcy.
Chapter 13, on the other hand, can only be filed by individuals and married couples and is designed for relatively less complex situations. It’s a tremendously flexible procedure but still a relatively streamlined one—especially compared to Chapter 11 reorganization. The primary way that the law tries to limit the Chapter 13 option to less complex situations is by limiting the amount of debts owed by the person filing the case.
Currently an individual filing a Chapter 13 case, or a married couple filing one jointly, must have less than $383,175 in combined unsecured debts and ALSO less than $1,149,525 in combined secured debts.
Where Do These Irregular Amounts Come from?
These dollar limits do sound arbitrary. To some extent they are, simply reflecting a Congressional compromise going back 37 years to the original passage of the Bankruptcy Code in 1978. The limits back then were only $100,000 unsecured debt and $350,000 secured debt. These didn’t change until more than doubling in 1994 to $250,000 and $750,000, respectively, with increases reflecting inflation every three years thereafter.
The current amounts have been in effect since April 1, 2013 and will change again on April 1, 2016.
What Are “Noncontingent, Liquidated Debts”?
The statute specifically says that you “may be a debtor under Chapter 13” only if you owe, “on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $383,175 and noncontingent, liquidated, secured debts of less than $1,149,525” (with the appropriate current amounts substituted for the initial ones).
So what is a debt that is “noncontingent, liquidated”? To oversimplify a bit, these two words are intended to make clear that only real debts, ones you really owe with a known dollar amount are counted for the these debt limits.
“Noncontingent” means that you are presently liable on the debt, not only liable if some event does or does not occur. “Liquidated” means that you owe a specific and determinable amount. A contingent debt would include one that you would only owe if somebody else did not pay it. A noncontingent debt would be one which you owe jointly with someone else but the creditor has no obligation to first pursue the other debtor. An unliquidated debt would include a lawsuit against you for unspecified damages; a liquidated debt could be a lawsuit where the alleged debt amount can be determined, even if it might be disputed.
The point is debts that are ambiguous about whether you really owe them and ambiguous about how much you might owe are not included when adding up your debts to see if you fit within the Chapter 13 debt limits.
In the Unusual Event that You Are Over the Debt Limits
Most of the time you will either be clearly under both secured and unsecured debt limits or clearly over one of them.
Even if you are over the limits, there may be other solutions if you really need the benefits of a Chapter 13 case.
One possibility is filing a so-called “Chapter 20” case—first a Chapter 7 case to discharge much of your debts, followed immediately by a Chapter 13 case to deal with the special debts that Chapter 13 often deals with better. (This is informally called a Chapter 20 because 7 + 13 = 20). The discharge of debts in the Chapter 7 case will likely get you under the Chapter 13 debt limits, qualifying you for it. And then although the Chapter 13 cannot discharge any more debts (because it’s filed too soon after the Chapter 7 one), it could well protect you from your remaining special creditors as you pay their debts that the Chapter 7 case could not address—such as unpaid mortgage, vehicle, or child support payments—based on a payment schedule that you could afford.