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