Written By: Alan S. Wolf
While any entity can file a Chapter 7 or Chapter 11 case, Chapter 13 cases are limited to those debtors whose secured and unsecured debt is below certain threshold limits. These limits are determined under a complex formula provided under section 104(a) of the Bankruptcy Code which also calls for a reassessment of these limits every three years. The new three year period will commence on April 1, 2013. For cases filed on or after April 1, 2013, and for the three years thereafter, the new debt limits are as follows: unsecured debt $383,175 and secured debt $1,149,525. The new debt limits are a $22,700 increase over the old unsecured debt limit of $360,475 and a $68,125 increase over the old secured debt limit of $1,081,400.
Essentially, these new limits mean that even a greater number of borrowers can file a Chapter 13 case. Also, the higher limits mean that the borrowers who file Chapter 13 cases will, on the whole, include more sophisticated high income borrowers. For example, assuming that the borrower’s unsecured debt was within the debt limit and the borrower’s only secured debt was his or her mortgage, and further assuming that the borrower put 20% down to purchase the home, borrowers owning homes of up to approximately $1,437,000 would qualify for Chapter 13! Put another way, not only do virtually all Fannie, Freddie, HUD and VA borrowers qualify for Chapter 13 (except perhaps those with multiple liens on one or more properties) but most jumbo borrowers qualify as well.
Servicers seldom focus on Chapter 13 debt limits but in cramdown situations these numbers become very important. For example, in most jurisdictions if the amount owed on the mortgage is $1,100,000 but the debtor is attempting to cramdown the loan to the current market value of $700,000, the debtor has mistakenly just admitted that the unsecured debt is $400,000 and beyond the Chapter 13 limit. When a case is filed that is beyond the Chapter 13 limits, it must be dismissed. Once the Chapter 13 case is dismissed, any cramdown attempt can only take place in Chapter 11 where there are greater cramdown protections. Accordingly, in high home value states such as California, New York and New Jersey, servicers should pay close attention to Chapter 13 debt limits where there is a proposed cramdown.
The new Chapter 13 limits will allow an even greater number of borrowers to file Chapter 13 and those borrowers will include highly sophisticated jumbo borrowers. Where a debtor is proposing a cramdown, servicers should carefully review Chapter 13 debt limits as a potential defense to the cramdown.