It is well-known that Chapter 13 bankruptcy is the form of bankruptcy available to those who fail to qualify on an income basis for Chapter 7 bankruptcy.
It is also the form of bankruptcy most useful for those who seek to stop a foreclosure, unburden the titles to their homes of under-secured second or third mortgages, or who need to restructure non-dischargeable debt like recent tax debt in order to make repayment affordable.
What is less well-known is that Chapter 13 bankruptcy has its own eligibility criteria.
The Detroit Chapter 13 Bankruptcy Debt Limit Eligibility Requirement
While there is no upper limit to the amount of income you can earn to qualify for Chapter 13 bankruptcy in Michigan, there are limits to the amount of debt you can hold.
In contrast, in Chapter 7 bankruptcy, there is no limit to the amount of debt you can owe—and discharge. The only question in that form of bankruptcy is whether you can “pass” the Mean Test income qualifying standard and whether or not you will have assets liquidated.
In Chapter 13 bankruptcy, there is no income qualification. Neither are your assets ever seized and liquidated in Chapter 13 bankruptcy. Instead, the US Bankruptcy Code limits the amount of debt you can discharge as a general qualification.
The debt limits differ, further, depending upon the classification of your debt: secured vs. unsecured.
“Secured” debt is the debt that you hold that is “secured” with collateral. A residential mortgage loan is the most common type of secured debt held by most Michigan residents. When you sign the promissory note that personally obligates you to pay $X per month for X number of months on the home loan, you also sign a mortgage, a security agreement, making the house collateral guaranteeing your payment. If you don’t pay, the home is foreclosed.
“Unsecured” debt is the debt you hold which has no collateral securing it. Credit card balances, hospital and medical bills, personal loans, debts owed to friends and family members, and back-rent are all common examples of “unsecured” debt.
Historically, it was relatively rare for a Metro Detroit bankruptcy lawyer to meet with a potential client who failed to qualify for Chapter 13 on this basis. Real estate values were depressed. The real estate market in southeastern Michigan was not booming.
However, over the past few years, this has changed. Now, the real estate market in Metro Detroit is, if not as blazingly hot as is the case in other parts of the country, still at a high-point relative over to the market highs of the past 15 years.
Further, interest-rates on mortgage and other lending is ticking up accordingly—and the question of Chapter 13 debt limits is no longer academic in any given case. While these Chapter 13 debt limits are raised from time to time, this has not, until recently, happened in quite a while.
However, on February 4, 2022, the Judicial Conference of the United States announced and recorded much needed Chapter 13 bankruptcy debt limit increases into the Federal Register—making them official.
How Does Chapter 13 Bankruptcy Work in Michigan?
First, how does Chapter 13 bankruptcy work, exactly, and what was the effect of the debt limit requirement?
Chapter 13 bankruptcy is a “reorganization” bankruptcy. This is in contrast to a Chapter 7 “liquidation” bankruptcy. That is, in Chapter 7, as noted above, your property can be seized and liquidated in order to repay some or all of your debt.
In Chapter 13 bankruptcy, this doesn’t happen.
Instead, in Chapter 13, you “reorganize” your debt. That is, you file a 3-5-year payment plan with the Bankruptcy Court which separates your secured from your unsecured debt and allows you to repay your secured and other “priority” debt off in full before paying any money to your unsecured creditors.
Unsecured debt, in Chapter 13, is paid last, after all other creditors. Unsecured creditors only receive whatever is left over from the monthly Chapter 13 Plan payment you are required to make to the Bankruptcy Court each month that is not paid to your secured and other priority creditors.
Sometimes, the amount that unsecured creditors receive is essentially zero.
During the entire length of this 3-5 year-long process, your creditors are stayed by a Federal injunction from engaging in any collections activity, with very few exceptions.
At the end of the Chapter 13 bankruptcy process, if you have successfully made all of your monthly plan payments and have complied with all of the other requirements of the process, you will emerge from bankruptcy with your mortgage paid off or current, with no arrears, with your car paid off or in current status, with all non-dischargeable debts fully repaid or current (with the possible exception of student loan debt)—and with no dischargeable unsecured debt at all.
The debt limits, therefore, are design to ensure the affordability of Chapter 13 for American consumers. Chapter 13 is not designed as a business bankruptcy option but to allow the repayment for what Congress (and subsequent Judicial Conferences) have viewed as a “normal” amount of debt for individuals.
The effect of the Chapter 13 debt limits, in theory, was to ensure the integrity of Chapter 13 bankruptcy as “consumer” form of debt relief and not as an “easy out” for high-rolling business debtors.
In practice, the debt limits have made it more difficult for “regular” consumers who happen to own real estate with values rapidly increasing beyond their control to file for Chapter 13 bankruptcy.
The April 2022 Chapter 13 Debt Limit Increase
On April 1, 2022, the Chapter 13 debt limits increased as follows:
- Secured Debt Limit: Increased from $419,275 to $465,750.
- Unsecured Debt Limit: Increased from $1,257,850 to $1,395,875.
For Detroiters, these amounts likely seem fairly high. But a mortgage amount of even $465,750 is not unusual for many areas of Wayne, Oakland, and Macomb County. You can scarcely find, for example, a single-family home in Northville for less than that amount.
It is a low single-family home sale price for not only Northville and West Bloomfield and Grosse Pointe and other famously higher end area of the region—but also, these days, for Royal Oak, the northwest quadrant of Ferndale, and elsewhere.
The Chapter 13 bankruptcy debt limits, even with this increase, will still continue to impact Metro Detroiters seeking debt relief.
What Happens If You Don’t Qualify for Chapter 7 But Exceed the Chapter 13 Debt Limits?
So this begs the question: what if you earn too much to qualify for Chapter 7 bankruptcy but hold a mortgage obligation or other liabilities exceeding the Chapter 13 debt limits?
This is a sticky wicket. Strictly speaking, your only remaining bankruptcy option is an “individual” Chapter 11 bankruptcy. (Recall that Chapter 11 is the form of bankruptcy filed by companies such as General Motors when the going gets tough.)
However, if you think that this is your situation, you shouldn’t necessarily jump to that conclusion and either head straight into a Chapter 11—or decide against the bankruptcy process entirely.
What you should do if this feels like it could be your own “sticky wicket” is to schedule an initial consultation with an experienced Michigan bankruptcy attorney to discuss your prospects for Chapter 7 or Chapter 13 bankruptcy—and the possibility that some of your debt may not actually trigger the application of the debt limits to begin with.
Chapter 13 Bankruptcy Debt Limits: The Bottom Line
The bottom line with regard to the Chapter 13 bankruptcy debt limits is that you should not attempt to analyze your own bankruptcy eligibility. Instead, let an experienced Detroit bankruptcy lawyer do it for you.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted thousands of Metro Detroit Chapter 7 and Chapter 13 bankruptcy clients for over 30 years.
If you are considering filing for Chapter 7 or Chapter 13 bankruptcy, contact us now to schedule your free, initial consultation.