Frequently potential bankruptcy clients ask me this question. As in many things bankruptcy my answer is: “it depends.” It depends on which type of bankruptcy you want to file. For most consumers this is a choice between chapter 7 and chapter 13.
Chapter 7 Has No Debt Limits
If you want to file chapter 7 and qualify there are no debt limits. The big word in this sentence is, “qualify”. For most people there is no issue here. However, for some you don’t get high debt unless at sometime you qualified for it. That would normally mean high income as well. If you still have that income then there is a very good possibility that you will fail the means test and not qualify for a chapter 7 bankruptcy.
Chapter 13 Has Debt Limits
That leads to the next step, which is chapter 13. A Chapter 13 bankruptcy case has debt limits. Your total debt must be below certain amounts to even file the case. As of April, 2013 the debt limits to file chapter 13 are as follows:
1) $394,725 for unsecured debt
2) $1,184,200 for secured debt
This can be a real problem for the high-income debtor as well as those with who earn more modestly when you need the relief you can only find in chapter 13.
High Income Debtor and Chapter 13 Debt Limit
The problem if you have a high income is that you qualified more of everything including debt. You have expensive real estate, maybe more than one home as well as investment properties, nice cars all with mortgages and car loans to match. It doesn’t take a lot of effort to get over the chapter 13 secured debt limit with these kinds of assets. Don’t forget the credit cards. Platinum, Black, and Maroon cards all help you exceed the unsecured debt limit.
Normal Income Debtor and Chapter 13 Debt Limit
It may be hard to believe, but with a lower income person can run afoul of the chapter 13 unsecured debt limit as well. There might be big unsecured debt balances for repossessed cars, mortgage loan deficiencies, lawsuit claims, and even credit cards.
The real tragedy happens when you start to think about chapter 13 as an option. You may have seen a lawyer and even entered into a fee contract with him. Then you do nothing. All the while interest keeps running on credit cards, back taxes and civil judgments. With the right set of circumstances, sitting on your thumbs can easily push you past the debt limit.
There still are options. A chapter 7 filing, if you qualify, will deny you the benefits of chapter 13 you need unless you wait another 4 years so you can receive a discharge. There is also the individual chapter 11 bankruptcy. Chapter 11 is not a good fit for many debtors. It is complicated and very expensive.