The Unsecured Debt Limit for Chapter 13 Eligibility: Do Unsecured Junior Liens Count?

Yes. To be eligible to file a Chapter 13 bankruptcy, your unsecured debts (debts not tied to property) must be less than $336,900 and your secured debts (debts providing the creditor the right to take certain property if you default) must be less than $1,010,650.

Distressed homeowners often file Chapter 13 bankruptcies to set up a payment plans that allow them to make up their missed mortgage payments and cancel any junior deed of trust liens that the home no longer secures because of a drop in the home’s value.

But if your primary residence is significantly underwater (the amount you owe is much more than your home is worth), the unsecured debt limit may make you ineligible to file a Chapter 13. This is because when the value of the home has decreased so a foreclosure would leave nothing for a junior deed of trust holder after senior claims are paid, the bankruptcy court treats the claim as unsecured for eligibility purposes.

Partially secured first deeds of trust, however, are treated as secured and are subject to the much less restrictive debt limit. So, for example, if your primary residence is worth $400,000 and you owe $500,000 on your first deed of trust, and $200,000 on your second deed of trust, the first lien is partially secured by the $400,000 value in your home. The remaining $100,000 does not count as unsecured for eligibility purposes because part of the lien is secured. The second lien, however, is completely unsecured and the $200,000 counts toward the $336,900 unsecured debt limit. If your remaining unsecured debt (i.e. credit cards or other unsecured junior liens) exceeds $136,900, you are ineligible to file a Chapter 13 to save your home. (It is more difficult to save your home in a Chapter 7 bankruptcy).

In a recent 9th Circuit decision, a California Bankruptcy Court acknowledged the unfairness the unsecured debt limit causes for many middle class homeowners. Chapter 13 debts limits are too low for a large number of people, mainly because plummeting home values have left so many homeowners with large amounts of unsecured debt. The debt limits and the treatment of unsecured junior liens for eligibility purposes prevents many financially distressed homeowner from access to a Chapter 13 bankruptcy, thereby forcing them into a much more expensive Chapter 11 bankruptcy, or a Chapter 7 bankruptcy in which it may be much more difficult to save their home.

You may, however, be able to get eligible for a Chapter 13 bankruptcy by discharging unsecured claims in a Chapter 7. Contact a Seattle Bankruptcy Attorney for more information.

Weitz Law Firm, PLLC
520 Kirkland Way, Ste 103
Kirkland, WA 98033
425.889.9300

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What type of bankruptcy should I file?

Most people have one of two options for debt relief through bankruptcy- a Chapter 7 or Chapter 13 petition. In a Chapter 7 bankruptcy, almost all your debts are discharged. In exchange for this discharge, the bankruptcy trustee can take any property you own that is not exempt from collection, sell it, and distribute the proceeds to your creditors. What property is exempt from collection depends primarily on state law. Typically, exemptions include some equity in your home and car, retirement funds, public benefits, and most household goods, furniture, furnishings, clothing, appliances, books, and musical instruments. A Chapter 7 bankruptcy petition is much faster and can be completed within four months. To be eligible to file a Chapter 7 bankruptcy, you must pass an income means test- your income (averaged over the last 6 months) must be less than the state median income. But an income above the state median will not automatically disqualify you. If you are close to the state median income, you may be able to deduct certain expenses to reduce your income to the state median.

A Chapter 13 bankruptcy petition requires a repayment plan that lasts for a minimum of 3 years. It allows you to keep your home and possibly strip back second mortgages if your home is underwater.

Types of Bankruptcy Cases

What happens after I file bankruptcy?

After the bankruptcy petition is filed, the court will appoint a trustee and call a meeting of all your creditors. The trustee and your creditors can ask you about your assets, income, and expenses.

In a Chapter 7, the trustee will determine what assets, if any, the court can take possession of and sell. But almost all your assets will be exempted (protected). Once the trustee determines that there are no assets available for liquidation, almost all your outstanding debts are discharged.

In a Chapter 13, you must include a repayment plan that provides for monthly payments to creditors in your petition. Your creditors may question your income and expenses to try to obtain a larger monthly payment amount. Once the repayment plan is confirmed, you must make the payments for the required time period or your bankruptcy may be dismissed.