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New Changes to Chapter 13 Bankruptcy Could Help Consumers

A congressional bill introduced by Iowa senator Charles Grassley (SB 3823) would increase the debt limits in Chapter 13 bankruptcy and make filing for Chapter 13 bankruptcy much easier. 

Chapter 13 is ideal for those who have money tied up in secured assets like a home mortgage, a second mortgage, car payments, or are paying off work-related assets. During the pandemic, the number of consumer bankruptcies was expected to skyrocket, but that never happened largely because government lifelines extended the livelihoods of individuals and businesses. This delayed some bankruptcies, which were then filed in 2021, creating a temporary spike. However, the overall number of bankruptcies remains lower than average, and even as we experience small spikes in bankruptcy filings, the numbers are not as high as they were before COVID-19.

Nonetheless, there are some folks finding themselves in a bit of a pickle. Chapter 7 bankruptcy requires that you make less than the state median in order to qualify (failing special consideration by the courts). Chapter 13 bankruptcy requires that you owe less than specific debt limits in order to qualify. Some folks find themselves in the uncomfortable position of owing too much money to qualify under Chapter 13 and making too much money to qualify under Chapter 7. For them, the options are limited. An individual can either file under Chapter 11 or execute a Chapter 20, which discharges their unsecured debts in Chapter 7 while rolling the remaining amount into a Chapter 13. Hopefully, this gets them under the threshold. Otherwise, they have to spend a lot more money in Chapter 11, which can take years to resolve.

How the New Changes Will Help

The law will make it easier to file for a Chapter 13 bankruptcy while also raising the debt limit. Currently, you are only allowed to owe $1,257,850 for secured debts and $419,275 in unsecured debts. The new rule would make the debt limit $2,750,000 for all debts. So, it would not matter how much you owe in unsecured debt or secured debt; So long as your debts remain under $2.75 million, you would still be eligible to file under Chapter 13.

The new rule is likely to increase the number of consumer bankruptcies filed under Chapter 13 while reducing the number of consumer bankruptcies filed under Chapter 11. This is a good thing for debtors. Chapter 11 bankruptcy is often quite expensive and those in debt usually cannot afford yet another expense. Hence, why Chapter 11 is generally set aside for businesses and not individuals or couples. 

Should I Wait or File Now?

Consulting a bankruptcy attorney can help you determine if it is in your best interests to wait for the new rule to take effect or file now. We cannot be 100% certain that the rule will go into effect, and even if we were, we cannot be certain when. A bankruptcy attorney can help you determine if Chapter 11 is a better option than waiting for Chapter 13 rules to change. Call Christopher Arrington today to schedule a free initial consultation, and we can discuss your options in more detail. 

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