I Actually Dont Qualify For Chapter 13?
By Michael Doan on Jun 1, 2008 in Bankruptcy Practice and Procedure, California, Chapter 13 Bankruptcy, Choosing Bankruptcy Attorney, General Bankruptcy Information, Lawyer to Lawyer, Role Of The Lawyer, Venue and Qualifications
Many people are under the mistaken impression that they qualify for Chapter 13, when in fact, they are actually over the debt limits. They simply add up all their secured debt and unsecured debt, without digging a little deeper to really ascertain whether such debt is actualy secured or unsecured.
Chapter 13 Eligability under the Bankruptcy Code is determined by 11 USC 109(e), which presently allows a debtor to file for chapter 13 protection, provided:
1) Secured Debt is under $1,010,650.00, and
2) Unsecured Debt is under $336,900.00.
Until recently, these debt limits were quite simple to use to determine whether one was eligable for chapter 13 relief. Now, however, with the recent drop in real estate values, the determination is not so easy. This is because most courts now look to the substance of the secured debt claim and not merely their label.
For example, if there is a second mortgage on real estate that used to be totally secured, but now due to the drop in real estate values, is now partially or totally unsecured, this new unsecured amount gets added to the other unsecured debt amount and could trigger disqualification. Consider the following example as expressed in years 2006 and 2008:
2006: Home Value $1,000,000. First mortgage $800,000. Second Mortgage $200,000. Other unsecured debt $150,000. Totals: $1,000,000 secured and $200,000 unsecured. CLEARLY QUALIFIES FOR CHAPTER 13.
2008: Home Value now $800,000. First mortgage $800,000. Second Mortgage $200,000. Other unsecured debt $150,000. Total $800,000 secured and $350,000 unsecured. FAILS TO QUALIFY SINCE UNSECURED EXCEEDS $336,900.
The debtor in 2008 no longer qualifies for Chapter 13 since the Courts do not view the second mortgage as secued anymore due to the decline in real estate value. So now the debtor is stuck with filing a costly chapter 11 case.
Out here in the 9th Circuit, the Scovis Case follows this logic and governs us:
Section 506(a) provides in pertinent part:
An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, . . . is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim.
HN8It is true that although § 506(a) speaks in terms of an “allowed claim,” applying § 506(a) to § 109(e) is necessary to prevent “raising form over substance and manipulation of the debt limits” to achieve Chapter 13 eligibility. Soderlund, 236 B.R. at 274. By merely looking at the value of Debtors’ residence, the first deed trust, and the judgment lien, it is clear that Henrichsen’s judgment lien is undersecured to a significant extent. The listed value of Debtors’ residence is $ 325,000.
So what is the solution other than paying $20,000 for a Chapter 11? Well, one remedy around this might be to file a chapter 7 first, remove the $150k unsecured debt, and then qualify to file for Chapter 13.
It just goes to show, that pre-bankruptcy planning and making sure you are with the right attorney, can make the difference between discharge of debts versus dismissal of case.
Written by Michael G. Doan
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