Determining When Debt Levels Are Too High for Chapter 13 Bankruptcy

Individuals considering whether to file a Chapter 13 bankruptcy case must not have too much debt or they will not be eligible to file for bankruptcy protection under that chapter. The rationale underlying this ceiling stems from the concern that a debtor with too much outstanding debt would never be able to pay back a sufficient amount of their claims. Specifically, with regard to unsecured debt, someone filing must have less than $383,175 of noncontingent, liquidated, unsecured debts at the time they file their petition commencing the bankruptcy action.


One thing potential debtors must bear in mind, when considering whether to file a Chapter 13 case, is that just because a loan or line of credit was procured using one’s home as collateral does not mean that, at the time a bankruptcy petition is filed, all of the debt incurred by such loan or credit extension is actually considered  secured debt. The dominant view among courts considering the issue of what constitutes “unsecured debt” is that some debt accrued in what is otherwise a secured transaction is actually unsecured debt where the amount of the debt exceeds the value of the collateral in which creditors possess a security interest. The recently-decided case of In Re Garcia, Case No. 14-10792 TA (U.S. Bankr. Ct. D. N.M. 2014) illustrates how this rule is applied in determining whether an individual qualifies as a Chapter 13 debtor.


In Garcia, the debtor owned a principal residence valued at $190.000 at the time he filed his petition. But beyond the primary mortgage used to buy the home, he had two other loans where the house was used as collateral. In fact, he owed even more ($201,259) on the first mortgage than the value of the collateral. Accordingly over $11,000 of that debt should be viewed as “unsecured debt”. And since only that first mortgage can be deemed as “secured” up to the extent of the home’s value, the entire respective amounts owed on the other two junior mortgages ($73,482 and $7500) must be considered unsecured debt.


For purposes of calculating how much unsecured debt this individual had at the time he filed, it is necessary to add these unsecured debt amounts to the debt reflected by other unsecured claims listed by the debtor in the Schedule filed by debtors at the beginning of such a case. As the sum of the unsecured debt for the aforementioned three loans, when added to the other unsecured debt listed totaling about $323,000, puts the grand total over the  $383,175, the bankruptcy court in this case decided the debtor was not eligible to proceed under Chapter 13.


In Albuquerque, Giddens & Gatton Law, PC has bankruptcy attorneys who offer expert handling of Chapter 7, Chapter 11, Chapter 12 and Chapter 13 bankruptcy cases and can provide advice over which type of bankruptcy action fits one’s particular needs. The firm represents many debtors and creditors in Albuquerque, Santa Fe, Taos, Raton, Farmington, Gallup, Grants, Roswell, Los Lunas, Placitas, Belen and the rest of New Mexico. Contact Giddens & Gatton Law, PC at (505) 633-6298 to set up an appointment or visit the firm’s website at Giddens & Gatton Law, PC is located at 10400 Academy Road N.E., Suite 350 in Albuquerque, New Mexico.