Chapter 11 Bankruptcy: Beyond the Debt Limits Under Chapter 13
The new debt limits under Chapter 13 effective April 1, 2010 pursuant to 11 U.S.C. 109(e) were increased to $1,081,400 for secured debt and $360,475 for unsecured debt. This change represents about a 7% increase in the allowed debt limits. However, this increase still excludes many California homeowners who bought into the Jumbo loans sold during the bull market up to the crash in 2008. This means that if you’re a homeowner owing more than $1,081,400 on your mortgage(s), then you are not eligible to file under Chapter 13. Now what do you do? Well, unfortunately, you have the option of either filing under Chapter 7, if you pass what is called the Means Test; or, you must file under Chapter 11, if you want to save your home.
Many of these high debt homeowners have been short selling their homes as a means to eliminate or effectively deal with their underwater mortgages mostly because the IRS, in 2007 enacted The Mortgage Forgiveness Debt Relief Act and Debt Cancellation. Now, I am not a tax adviser and encourage you to consult with your own tax adviser to determine your eligibility for income tax forgiveness. The problem with this remedy is that in a short sale, you’re giving up your home. What do you do if you want to keep your home and stop the foreclosure process? You will need to file bankruptcy under Chapter 11.
An individual considering filing bankruptcy under Chapter 11 faces both legal fees obstacles and lack of attorneys willing to perform the complex case requirements of a Chapter 11 bankruptcy case. Additionally, there are more complex and detailed reporting requirements to the Court. Just to get started in Chapter 11, you’ll be required to complete a prefiling credit counseling course; provide income tax returns; insurance policies; complete a real property questionnaire; and you must open new bank accounts, three in fact before your case is filed. The great news is that debts discharged through bankruptcy are not considered canceled debts by the IRS.
