CHAPTER 1, B. Increasing Access to Chapter 13: The Statutory Debt Limitations
Jurisdiction | United States |
B. Increasing Access to Chapter 13: The Statutory Debt Limitations
ABI Journal
October 2019
Robert S. Thomas, II
Chapter 13 Trustee
Baltimore
On April 1, 2019, the chapter 13 debt limits increased approximately 6.2 percent.1 Currently, an individual is eligible for chapter 13 relief if he/she has "noncontingent, liquidated, unsecured debts of less than $419,275 and noncontingent, liquidated, secured debts of less than $1,257,850."2 The increase is significant for many potential consumers considering an insolvency proceeding.
Over time, the debt limitations associated with chapter 13 have reduced access for many consumers to an appropriate chapter 13 insolvency proceeding. This has the negative effect of leaving potential consumers to choose between the cumbersome and expensive chapter 11 proceeding or, if they qualify, a possible chapter 7 liquidation proceeding. Chapter 13 was enacted to provide an alterative; however, the debt limits have not kept pace with the changes in consumer credit over the past 20 years.
Comparatively, Congress has recently passed two bankruptcy bills: one expanding on chapter 11 to create additional small business provisions, and one increasing the debt limit for family farmers filing for chapter 12 relief.3 These legislative actions show that Congress is interested in expanding access for small businesses and farmers, but no similar legislation has been enacted to provide increased access for consumers.
As many chapter 13 trustees know, it is evident that student loans are affecting — and will continue to affect — debtors across all age demographics. In the last few years, student loan debt has become the second-largest consumer obligation after mortgages.4 It is not uncommon to see cases in which the debtors have more than $150,000 in unsecured student loan obligations. With this staggering unsecured student loan debt, more people will not be eligible for chapter 13 because they will be over the statutory unsecured debt limit contained in 11 U.S.C. § 109.
The Increase in Overall Consumer Obligations in the U.S. Economy
Chapter 13 debtors must propose a debt-adjustment plan that complies with 11 U.S.C. §§ 1322 and 1325. Debtors proceeding under chapter 13 "must agree to a court-approved plan under which they pay creditors out of their future income."5 Under chapter 13, a debtor uses post-petition disposable income to pay pre-petition debts under a confirmed plan over a three- to five-year commitment period.6 Eligibility for chapter 13, including the debt limits, is set out under § 109. The Consumer Price Index for All Urban Consumers (CPI-U) is used for inflation indexing under the Bankruptcy Code, which is updated every three years. Thus, the CPI-U also determines the chapter 13 debt limits.7 For two of the largest sources of consumer obligations (mortgages and student loan debts), the CPI-U metric has not sufficiently kept pace with the increase of those obligations.
Given today's marketplace, the secured debt limits with respect to real estate (i.e., mortgage debt) are outdated and do not take into account regional variations in real estate values, among other things. For many consumers, their biggest debts will be their home mortgage and student loans. When home prices rise, the amount that a consumer needs to borrow for a mortgage rises, likely putting the consumer over the secured debt limits to file under chapter 13.
For example, in various locations, even the median home price would likely put a consumer at or near the chapter 13 secured debt limit. The same is true when real estate prices fall. Under applicable law, the secured mortgage is only secured to the extent of the value of the collateral, which, as with any deficiency claim, is treated as an unsecured claim and added to the unsecured creditor pool to determine eligibility under § 109.8
The ABI Commission on Consumer Bankruptcy's Final Report found that the CPI-U has not kept up with residential real estate prices.9 While the CPI-U has risen 71 percent since 1994, the Case-Shiller Home Price Index, the most common measure of residential real estate prices, has risen 157 percent.10 Accordingly, the cost of homes and need for mortgage debt has increased at more than twice the rate of the CPI-U.
For student loan debt, the CPI-U has also been insufficient. Between 2007 and 2018, total student loan debt rose by 157 percent.11 Meanwhile, in the same time period, the CPI-U only increased by about 18 percent.12 According to data, the cost of tuition for a four-year nonprofit public college has risen by 213 percent since 1987, while the cost of private schools has risen by 129 percent.13 The ABI Consumer Commission recognized that both student loans and mortgage debt have risen faster than inflation and that this trend will probably continue.14
Eligibility to Be a Debtor Under § 109
Section 109 of the Bankruptcy Code is titled, "Who May Be a Debtor."15 The various subsections contained within this section "serve an important gatekeeping role. Those provisions 'specify who qualifies — and who does not qualify — as a debtor under the various chapters of the Code.'"16 Filing under chapter 13 allows a relatively small debtor to reschedule his payment obligations to his creditors, "retain his property and avoid the stigma of a straight bankruptcy."17
Congress codified and enacted the chapter 13 debt limits as part of the Bankruptcy Reform Act of 1978.18 As originally enacted, the debt limits for chapter 13 eligibility were $100,000 in noncontingent, liquidated, unsecured debts and $350,000 in noncontingent, liquidated, secured debts. These ceilings were expanded by § 108(a) of the Bankruptcy Reform Act of 1994 to $250,000 and $750,000, respectively.19 In addition, the 1994 amendments added § 104 to the Bankruptcy Code, under which the amounts in this and other sections would be adjusted for inflation without the need for later legislation.
Policy Behind Chapter 13 Debt Limits
The reason Congress created the debt limits relates to another change it made to § 109(e). Prior to the Bankruptcy Reform Act of 1978, only "an individual whose principal income [was] derived from wages, salary, or commissions" was eligible to be a chapter 13 debtor.20 Individuals whose income was derived from...
Get this document and AI-powered insights with a free trial of vLex and Vincent AI
Get Started for FreeStart Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting

Start Your 3-day Free Trial of vLex and Vincent AI, Your Precision-Engineered Legal Assistant
-
Access comprehensive legal content with no limitations across vLex's unparalleled global legal database
-
Build stronger arguments with verified citations and CERT citator that tracks case history and precedential strength
-
Transform your legal research from hours to minutes with Vincent AI's intelligent search and analysis capabilities
-
Elevate your practice by focusing your expertise where it matters most while Vincent handles the heavy lifting
