Individuals have several options when filing bankruptcy. Chapter 13 is often preferred for individuals with regular income who wish to keep their homes and other secured assets. In a Chapter 13 filing, the court will approve the debtor’s three-to-five-year payment plan, which generally provides for curing any pre-petition delinquency, maintaining payments on secured debt, and a pro rata payment to unsecured creditors based on the debtor’s disposable income. After a Chapter 13 debtor completes his plan, he will receive a discharge of some of his remaining, unpaid debts.
Increase in Chapter 13 Debt Limits
Debtors can only file for Chapter 13 if their total unsecured and secured debts are less than certain statutory amounts. The Bankruptcy Code provides for an increase of the Chapter 13 debt limits every three years. The new debt limits for Chapter 13 were published on February 12, 2019. Beginning April 1, 2019, the Chapter 13 debt limit increased to (a) $419,275 for a debtor’s noncontingent, liquidated unsecured debts, and (b) $1,257,850 for a debtor’s noncontingent, liquidated secured debts. This increase is about 6 percent, which is roughly double the increase in 2016.
What options do debtors have who initially exceed the Chapter 13 debt limits? Many high-income individuals file Chapter 11; however, onerous administrative requirements, high quarterly fees, and uncertain litigation and professional fees and costs lead debtors to seek alternatives from filing Chapter 11. Some debtors file a “Chapter 20.” Under this strategy, the debtor first files a Chapter 7 to discharge much of his unsecured debts (assuming the debtor can meet the Chapter 7 means test). Once he obtains a discharge and lowers his total amount of unsecured debt, the debtor can file a Chapter 13 case to restructure the remainder of his debts.
Spouses may attempt to file two separate cases. By filing separate cases, the total amount of debt per debtor is decreased, which may result in meeting the debt limit requirements. If the debtors have individual debts, one debtor may seek a Chapter 7 discharge of unsecured debts while the other debtor may restructure secured and unsecured debts under a Chapter 13.
Depending on the jurisdiction, spouses may be successful in arguing that the Chapter 13 debt limits should be higher for spouses filing as joint debtors. A minority of courts will consider the total amount of debt attributable to each of the joint debtors to determine whether each debtor meets the Chapter 13 debt limits. If only one debtor meets the debt limits, he may remain in Chapter 13, while the debtor who exceeds the debt limits must either dismiss his case or convert it to a different chapter. Notably, while this strategy is effective in a minority of courts, some jurisdictions have specifically ruled that the joint debtors’ combined debts must meet the Chapter 13 debt limit requirements to remain in that chapter.
How Does This Affect Student Loan Debt?
Many individuals with regular income struggle with unmanageable student loan debt. According to a recent Bloomberg report, the number of individuals who are delinquent 90 or more days on student loan payments increased to a record high in the fourth quarter of 2018, despite the decreasing unemployment rates. Often, debtors with regular income but high student loan debts fail the Chapter 7 means test requirements while simultaneously exceeding the Chapter 13 debt limits. For such debtors, Chapter 11 may be the only bankruptcy relief available.
However, the Bankruptcy Court for the Northern District of Illinois recently indicated that courts are considering solutions to address these issues and offer more flexibility. The Chapter 13 trustee moved to dismiss the debtor’s case, arguing that his debts (largely student loan and credit card debt) exceeded the debt limits. The Bankruptcy Court held that the debtor could remain in Chapter 13, finding that, while section 109(e) sets standards for Chapter 13 eligibility, section 1307(c) is the section under which a Chapter 13 case could be converted or dismissed for cause. Further, after noting the legislative history of debt limits, which were intended to prevent large businesses from filing Chapter 13, the Bankruptcy Court held that, under these facts, no cause existed to dismiss the case. On appeal, the District Court for the Northern District of Illinois reversed the Bankruptcy Court’s decision, finding that exceeding the debt limits constituted cause to convert or dismiss the Chapter 13 case. Although the Bankruptcy Court’s decision was reversed, the case signals that professionals and courts are considering solutions to address unmanageable student loan debts and Chapter 13 debt limits.