How Debt Limits Impact a Bankruptcy
Typically, the menu of bankruptcy chapters presented to individuals is short: you’ve got chapter 7 and you’ve got chapter 13. Because the various flavors in which those two chapters can come is endless, though, it’s relatively rare that someone’s forced to order off the menu and file a chapter 11. When that happens, it’s typically for one reason: Debt Limits. Section 109(e) of the bankruptcy code sets a dollar amount limit on how much debt an individual can have and file a chapter 13 reorganization case. Effective April 1, 2016, those limits are raised from their previous levels to $1,184,200 for secured debt and $394,725 for unsecured debt. Why did the drafters of the bankruptcy code limit the amount of debt someone can reorganize in a chapter 13?
First: chapter 11 gives a voice to creditors at the plan confirmation stage of a case; Second: it empowers debtors (among other things) to stretch out their plan payments beyond the five year limit of chapter 13; and, Third: it increases the visibility of the case in the eyes of the court and Bankruptcy Administrator’s office to make sure that the matter is handled with integrity. Because large debt amounts often indicate some kind of business, investment, or real estate imbroglio, that kind of attention and flexibility is helpful.
Because chapter 11 is more time consuming and expenses, we work hard to qualify our clients for chapter 13 whenever possible. Sometimes we can skate through a chapter 13 simply by creatively classifying the debt or by the chapter 13 trustee’s office simply allowing the case to continue in chapter 13, absent any creditor opposition. But when the debt limit ceiling is unavoidably broken, chapter 11 remains an effective tool by which to reorganize debt.
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