Recently, the Southern District Bankruptcy Court ruled that certain Chapter 13 Debtors could not qualify for Chapter 13 relief since they exceeded their debt limitations. Pursuant to 11 USc 109(e), chapter 13 relief is not available to debtors with unsecured debt higher than $336,900 or secured debt higher than $1,010,650.00.
In the case of In re Estrada published on 8/26/09, the Bankruptcy Court was presented with a new twist to the debt limitations in chapter 13. Specifically, the Court had to address whether mortgage claims, which appear to be secured on their face against residential real estate, are unsecured in light of the current housing conditions.
The Court eventually concluded that the second mortgage was entirely unsecured and part of the first mortgage was unsecured as well, for 109 purposes. This was due to the fact that the house was underwater with negative equity, and thus there was no security for the second mortgage to attach to. Likewise, the Court reasoned that a portion of the first mortgage was also unsecured for the same reason.
While the case was an unpublished opinion, it appears to be following the majority of cases across America where Bankruptcy Courts are ruling on these matters, and also cites the Supreme Court case of J o h n s o n v . Home St a t e Ba n k , 5 0 1 U. S. 7 8 ( 1 9 9 1 ) for its position.
So be careful. Just because you think you qualify for chapter 13 relief due to the debts you have which appear on their face to fall under the 109 limits, you must dig deeper and focus on substance over form. As always, seek a qualified attorney to protect and maximize your rights if you are considering bankruptcy protection.
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