Debt Limits for Chapter 13

Debt Limits for Chapter 13 and Subchapter V Bankruptcy Cases Are Set to Decrease Without Congressional Action

In order to aid debtors and small businesses struggling during COVID, the debt limits for Chapter 13 and Subchapter V (of Chapter 11) bankruptcies in the Bankruptcy Code and Small Business Reorganization Act (SBRA) were raised by the CARES Act. The increased limits were then continued by the COVID-19 Bankruptcy Relief Act of 2021, and they were then extended again under the Bankruptcy Threshold Adjustment and Technical Corrections Act of 2022 (BTATC). This allowed more debtors and small business owners to take advantage of these more efficient and less expensive forms of bankruptcy, when compared to filing a traditional Chapter 11 bankruptcy. According to a recent American Bankruptcy Institute report:

  • Individual chapter 13 filings during the first quarter of 2024 were 45,958, a 9 percent increase over the 42,362 individual chapter 13 filings in the same period of 2023.
  • Since the enactment of SBRA, over 25% of all chapter 11 filings have been Subchapter V filings.

Under the BTATC, the debt limits for chapter 13 filings were maintained at $2,750,000 of the total debt, combining both secured and unsecured debt. The previous limits treated these two types of debt separately. Prior to the CARES Act and the later legislation that maintained the higher limits, in a Chapter 13 bankruptcy, debtors were restricted to unsecured debts to taling less than $419,275 and secured debts totaling less than $1,257,850. BTATC also maintained the debt limit for small businesses under Chapter Vat $7,500,000. This was increased from the $2,725,625 limit in the SBRA.

The sunset date under the BTATC is set for June 21, 2024. If action is not taken to extend these increased limits, the debt limits for Chapter 13 and Subchapter V will revert to the debt limits in the Bankruptcy Code and the SBRA. An automatic inflation adjustment under the Bankruptcy Code increased the Chapter 13 debt limits to $465,275 for unsecured debt and to $1,395,875 for secured debt. Likewise, the Subchapter V small business debt limit has increased from $2,725,625 to $3,024,725.

Although there is still some hope for Congress to extend the current limits, it is fleeting. On April 17, 2024, the bi-partisan 2024 Bankruptcy Threshold Adjustment and Technical Corrections Act (S. 4150) was introduced in the Senate to extend the debt limits under BTATC for another two years. However, the bill is currently being reviewed by the Judiciary Committee and there is presently no vote scheduled on the legislation. Seeing that a Congressional fix is not imminent, Chapter 13 and Subchapter V bankruptcy debtors with debts above the reverted limits will be forced into the more expensive and complicated Chapter 11 process.

The case expenses and typical legal fees required in a Chapter 11 bankruptcy case make it more costly than filing for Chapter 13 or Subchapter V. In a Chapter 11 bankruptcy, fees and expenses can include the following:

  • $1,167 case filing fee; and the $571 miscellaneous administrative fee (compare this with the $313 filing fee for Chapter 13). These fees are charged in every Chapter 11 and Sub-chapter V bankruptcy case, and they do not vary based on the circumstances.
  • Quarterly filing fees to the United States Trustee’s Office, which are based on the quarterly disbursements in the case. These fees can range from $250 in cases with limited disbursements up to $250,000 in large corporate matters. These fees are not charged in either Subchapter V or Chapter 13 bankruptcy cases.
  • Chapter 11 attorney fees are higher than the fees charged for Chapter 13 or Subchapter V cases. Chapter 11 bankruptcies have been known to be quite expensive because of procedural requirements and the substantial amount of work required. Further more, Chapter 11 attorneys have several restrictions in receiving compensation. Once a case is filed, bankruptcy lawyers cannot get compensated for their legal fees or case expenses without notice to the parties in the case, and Court approval. Lawyers typically must wait a minimum of 4 months to even request approvalfor legal fees. Additionally, the lawyer’s fees and expenses have the same priority as other expenses of the debtor during the Chapter 11 case. In some cases, a lawyer may have to return some of their initial retainers to pay these other expenses.
  • Financial advisor fees, if a financial advisor is essential to the reorganization in the Chapter 11 case.

Unless Congress acts quickly, in a matter of days, the current debt limits for Chapter 13 and Subchapter V bankruptcy will expire and revert to the limits in the Bankruptcy Code. This will force debtors with higher debt into Chapter 11. In New York and in the Northeast in general (and other states with high mortgage debt such as California), many home owners have high mortgage balances which could push them above the reverted limits for secured debts in Chapter 13.  Additionally, debtors with high student loan debt, or personally guaranteed business debts may well be above the reverted limits for unsecured debt for Chapter 13 or Subchapter V. We will continue to monitor this situation and will provide an update on whether corrective action is taken, or not.

Contact The Law Offices of David I Pankin, PC

If you are struggling with debt and are contemplating a Chapter 13, 11 or Sub-chapter V filing, please feel free to contact the Law Offices of David I. Pankin, P.C. We have been helping debtors and small business owners obtain a fresh start for over 28 years. You can contact us at (888) 529-9600 to schedule a free in-office or remote consultation, or by using our easy online contact form.

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