While would-be Chapter 7 bankruptcy filers are subjected to a complex calculation involving debts, income, and expenses, the hurdles for those pursuing Chapter 13 bankruptcy are different. Generally, Chapter 13 bankruptcy will be an option if the debtor:

Is an individual–there is no Chapter 13 bankruptcy for businesses,
Is not disqualified by a recent dismissal,
Has demonstrable means to make plan payments, and
Does not have debts exceeding the current Chapter 13 debt limits

In a general sense, Chapter 13 bankruptcy is more accessible than Chapter 7 because Chapter 13 involves a repayment plan, and plan payments are based on the debtor’s disposable income. While the Chapter 7 means test is intended to ensure that people discharging their unsecured debts are truly unable to pay them, the Chapter 13 process itself regulates what is paid and what is discharged based in large part on the debtor’s ability to pay.

What are Chapter 13 Debt Limits?

Chapter 13 debt limits create a cap on the amount of debt a person may have and still be eligible for Chapter 13 bankruptcy. The limits are periodically adjusted. Until June of 2022, there were separate debt limits for secured and unsecured debts. Temporary legislation passed in June shifted the debt limit to an aggregate $2,750,000, with no separate limit for secured or unsecured debt. Unless this legislation is extended, limits will revert to the old two-category system in 2024.

Who is Affected by Chapter 13 Debt Limits?

The combination may be of particular help to Californians who have high mortgage debt in their pool of secured debt. At the end of 2021, the average outstanding mortgage balance in California was $401,954, compared with a national average of $223,952. The California figure is more than triple the average mortgage debt in some states, such as Ohio, Indiana, and West Virginia.

That disparity makes sense when you consider home values. In early 2022, Redfin reported that 8.2% of homes in the United States were valued at more than $1 million. But, of course, those million-dollar homes aren’t distributed evenly across the United States. Seven of the 10 metro areas with the highest percentage of homes worth more than $1 million are in California. Los Angeles makes the list, at 38.5%. But, it’s far from the top of the list. In four California metros, more than half of homes were valued at more than $1 million. San Francisco tops the list at 88.7%.

The combined $2,750,000 provides more buffer for Californians with high mortgage and other secured debt than ever.

Exceptions to Chapter 13 Debt Limits

Chapter 13 debt limits apply only to non-contingent, liquidated debts. That means that certain financial obligations—contingent and non-liquidated debts–won’t be counted toward debt limits for purposes of determining Chapter 13 liability.

A contingent debt is a debt you’re not obligated to pay unless and until some other event occurs. One common example is when the individual has personally guaranteed a business loan. In that situation, the individual typically has no obligation to pay the outstanding debt unless and until the business defaults. Therefore, if the loan is in good standing, the individual does not yet owe the debt—and may never owe the debt. So, the debt won’t be counted when calculating aggregate debts for Chapter 13 qualification purposes.

It’s important to note, though, that this exception generally does not apply to co-signed debts. Although as a practical matter a co-signer typically won’t have to make payment on a loan unless the primary borrower defaults, the contract usually obligates both the borrower and the co-signer. So, even though you may not be making payments (and may never make payments) on a loan you co-signed for a friend or family member, this type of debt will usually count toward the limit.

A non-liquidated debt is a debt that is not yet certain, either as to liability or as to the amount you may be obligated to pay. For example, if there is a lawsuit pending against you because someone sustained an injury on your property, it is not yet certain that you will be found liable for the injury, nor can the amount of any possible obligation be reliably determined. Thus, this type of debt will also be excluded from the debt limit calculation.

Options for Debtors Exceeding Chapter 13 Debt Limits

One option for individuals whose debts exceed the Chapter 13 caps may be to file for bankruptcy protection under Chapter 11. However, Chapter 11 is rarely a good option for consumer debtors, as the process is much more cumbersome and expensive than either Chapter 7 or Chapter 13.

Another possible option for some debtors is to file for Chapter 7 bankruptcy first, discharging enough unsecured debt to bring the remaining balance within debt limits. However, this option won’t be workable for all debtors, since some may be disqualified by the Chapter 7 means test and some may have too much non-exempt property to file for Chapter 7 and retain their assets.

The best way to determine the best option in your specific circumstances is to speak with a local bankruptcy attorney about your debts, income, asset, and goals. You can schedule a free consultation with one of the experienced bankruptcy lawyers at Borowitz & Clark by calling 877-328-1497.