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April 22, 2009

Eligibility for Chapter 13

A chapter 13 debtor cannot have more than $336,000 of unsecured debts when he files chapter 13, Section 109(e).  Whether he does or does not exceed this limit is determined by the schedules he files as long as the schedules are filed "in good faith."  (Gawd I hate that word!)  But does the unsecured portion of secured debt go in the secured column or the unsecured column?  I don't think there is any doubt that "secured debt" as used in 109(e) is determined by state law.  But what about Section 506(a) which bifurcates secured claims into secured and unsecured?

In the San Fernando Valley at least, the judges have been telling us that you have to read 506(a) to determine what is secured and unsecured and therefore the undersecured portion of a secured debt is included entirely in the unsecured debt column throwing many debtors into chapter 11 cases which they cannot afford.  The judges believe they are bound by the 9th Circuit's ruling in In re Scovis,249 F.3d 975 (9th Cir. 2001) and In re Soderlund, 236 B.R. 271 (9th Cir. BAP 1999).  There are three other circuit cases which unfortunately made the same blanket announcement.  In In re Day, 747 F.2d 405 (7th Cir. 1984), the collateral was almost worthless accounts receivable; In re Miller, 907 F.2d 80 (8th Cir. 1990), the collateral was vacant land of a nominal value and in In re Balbous, 933 F.2d 246 (4th Cir. 1991) the issue was how to treat selling costs when determining value. 

I am looking forward to doing the appeal on this issue although I wish Congress would just clarify it (and the 100 other mistakes in the code).  Congress decides who qualifies for what.  They should tell us more clearly and save everyone a lot of trouble. 

April 22, 2009 in Current Affairs | Permalink


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The ineligibility of a potential chapter 13 debtor for claims that can be wiped out by 1322/506 does seem illogical, however that's what we deal with on this coast as well (following your circuit's lead). See In re Smith, 325 B.R. 498, 502 (Bkrtcy.D.N.H.2005)

Posted by: tom | Apr 24, 2009 8:54:59 AM

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