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New Bankruptcy Debt Limits - What does this mean for Debtors?
On June 21, 2022, President Biden signed into law the Bankruptcy Threshold Adjustment and Technical Corrections Act (Bill S. 3823). What Bill 3823 does is it increases the Chapter 13 debt limits under Bankruptcy Code Sec. 109(e). However, what does this mean for debtors who are currently in bankruptcy or individuals looking to file for bankruptcy in the future? This blog will explore what this new change means and how it could help people in bankruptcy or looking to file for bankruptcy.
Types of Bankruptcy
There are several different chapters in bankruptcy. The most common types of bankruptcies are the Chapter 7, Chapter 13, and Chapter 11. The Chapter 7 is the most common type of bankruptcy in comparison to the other two and is mainly reserved for people with little to no assets (although people with assets can also file for Chapter 7). The Chapter 13 bankruptcy is more expensive and more complex than a Chapter 7, and usually reserved for: i) individuals that do not qualify for a Chapter 7; or ii) have equity in assets that they do not want to lose in bankruptcy (thereby paying out the equity in the assets to creditors over a specified period of time). Chapter 11 is the most expensive, complex, and usually reserved for i) businesses who want to reorganize debts; ii) or individuals who do not qualify for a Chapter 7 and are over the debt limits to be in Chapter 13.
Bankruptcy Debt Limits
Prior to the passing of Bill S. 38231, in order for a person to be able to file for Chapter 13 bankruptcy, an individual or couple could not have more than $465,275 in unsecured debt or more than $1,395,875.00 in secured debt. What this meant for individuals was the following: if you owed more than the figures outlined above, and you wanted to take advantage of the bankruptcy protections, you would be forced to file for Chapter 11 bankruptcy and forced to bear the high costs to file for bankruptcy (initials retainer deposits for a Chapter 11 can range from $10,000+).
Now, with the passing of Bill S. 3823, these debt limits have been raised to an aggregate amount of $2.75 million. Therefore, in order to be able to file for Chapter 13 bankruptcy, the debtor can’t have more than $2.75 million in secured and unsecured debt combined – making it easier for people to file for Chapter 13 bankruptcy.
This is extremely important because, as mentioned earlier, more people will qualify for Chapter 13 bankruptcy and will not have to be burdened with the high costs associated with a Chapter 11 bankruptcy or potentially expose themselves to a liquidation in a Chapter 7. This of courses raises the following question: what are the benefits of filing for Chapter 13?
Avoiding Conversion of Your Current Chapter 13
In various instances, a bankruptcy case may start off as a Chapter 13, but after all creditors file their claims, it comes to light that the debtor has exceeded the debt limits - forcing the debtor to either convert to another chapter or dismiss the bankruptcy case. For someone who has a lot of equity in assets, conversion of the bankruptcy to a Chapter 7 would mean the liquidation of all of your assets (which is what you were trying to avoid by filing Chapter 13). Therefore, the only other option would be to convert to a Chapter 11 which is extremely costly. If you can’t afford to pay for the retainer of a Chapter 11, then the last option would be to dismiss the case (and thereby putting you back in the same position that you were in before filing bankruptcy).
The increase of the debt limits would allow debtors currently in bankruptcy to remain in a Chapter 13 as opposed to i) converting to a Chapter 7 where their assets could be liquidated; ii) converting to a Chapter 11 and bear the high legal costs; or iii) having your case dismissed and putting you back into the same pre-petition financial situation that led to the bankruptcy filing.
A Chapter 13 Bankruptcy Can Help You Get Current with the Car & Mortgage Payments
More often than not, when a person has fallen behind on their car or mortgage payments, the bank expects full payment of the arrears in order to avoid a repossession of the car or foreclosure of the house. For obvious reasons, this can be extremely difficult for most. This is where a Chapter 13 bankruptcy Plan (structured as a re-payment plan) can serve as a great tool to pay back the arrears owed on a mortgage or car over a specified period of time.
A Chapter 13 Bankruptcy Can Help You Recover a Repossessed Vehicle
Picture this: You wake up one morning and the car is gone. When the dust settles, you realize that the car was actually repossessed and now the finance company wants a lump sum payment of the payments you are behind. What are your options?
Pursuant to Section 542 of the Bankruptcy Code, the debtor may compel the creditor to return possession of the vehicle by filing for bankruptcy. However, they may do so if: i) the creditor has not sold the vehicle to a third party; and ii) the vehicle was being financed and not leased.
Assuming that the vehicle is still in the possession of the lender, the bankruptcy attorney would let the lender know of your bankruptcy filing and arrange for the car to be returned to you. When you pick up the vehicle from the repossession yard, you will more than likely have to pay the repossession fees, but this is all that you will be expected to pay at that time.
You will then formulate a Chapter 13 Plan as explained above to get caught up with the payments owed on the car.
A Chapter 13 Bankruptcy Can Help You Lower the Car Loan Payments
On average, a car’s value decreases by 20% to 30% by the end of the first year and continues to depreciate in value by 15% to 18% each subsequent year2. With this in mind, it is not uncommon to owe more on the car loan than what the car is actually worth. This is where a Chapter 13 bankruptcy can help.
With the help of a Chapter 13 plan, the debtor can then propose to pay the “value” of the car as of the date of the filing as opposed to paying the full loan balance – this is referred to as a “cram-down”.
In order to do this, you would have to have financed the vehicle for more than 2 ½ years or 910 days, and you must pay the value of the vehicle within the timeframe of the Chapter 13 plan (3 to 5 years). Of course, the rate of depreciation varies depending on the vehicle, but if your car depreciates in value faster than others, or if you’ve financed a used vehicle, this can be beneficial to you instead of paying the full loan balance.
Finally, if you haven’t had the car for more than 2 ½ years, you may be able to reduce the interest rate to 4% to 6% through a Chapter 13 plan and pay this lowered interest rate for the remaining life of the loan. This is extremely beneficial for subprime borrowers who pay a high interest rate due to their lower credit scores.
The purpose of this blog is to shed light into this new law that raises the debt limits for Chapter 13 bankruptcies and bring some hope to those individuals who would not have been able to qualify for a Chapter 13 under the older debt limits. If this sounds anything like you, the best thing for you and your peace of mind is to speak with an experience bankruptcy attorney to discuss your options for your particular situation. Give me a call today for a free consultation.
Carlos is first and foremost a father. Having been born in Lima, Peru and raised in the inner cities of Elizabeth, NJ, Carlos understands what it is like to fight for those people that cannot represent themselves. Carlos has made it his commitment to supply his clients with personalized attention, comprehensive advice and sound legal strategies. Carlos is fluent in Spanish and has dedicated himself to bringing awareness on how our bankruptcy laws can help those in difficult situations.
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