By Ryan C. Wood
Sadly the Chapter 13 Bankruptcy reorganization debt limitations pursuant to 11 U.S.C. §109(e) are entirely unfair to bankruptcy filers and should have been changed many years ago. The problem is these debt limitations are creating unequal results more or less based upon geography and economics of the geographic area. The debt limitations pursuant to Section 109(e) have remained dreadfully unfair for many years.
What Are The Debt Limitations and How Have They Not Changed Over The Years
As of April 1, 2016, 11 U.S.C. Section 109(e) only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less that $394,725.00 and noncontingent, liquiated, secured debts of less than 1,184,200.00. These debt limitations are the limitations for all of 2017 and 2018. Section 104(a) of title 11 of the United States Code provides for an automatic adjustment every three years beginning April 1, 1998. The limitations are supposed to be modified ever three years to reflect the change in the Consumer Price Index for All Urban Consumers as provided by the Department of Labor.
Why Are Chapter 13 Bankruptcy Debt Limitations So Unfair?
Where do I start? How about that a person in an area where housing is expensive may have their primary house and a rental house and easily have over $1,184,000 in secured debt while a mere 50 miles away in the same jurisdiction homes sell for a mere $50,000 each. One person has nine homes with a total of $950,000 in secured debt and the other person has two homes with over $1,184,000 in secured debt and is over the debt limitations . . . . . Incurring $394,725 in unsecured debt in Planada, California [poorer than Mississippi by the way] for an individual or an individual with a failed business is much more difficult than an individual with a failed business in San Francisco. Can you see the inequity yet?
Chapter 13 Is By Far Cheaper For The Bankruptcy Filer
A Chapter 13 case, or debt adjustment of individuals with regular income, is an efficient and cheaper way to reorganize debts versus Chapter 11 reorganization. Chapter 11 is the alternative way to reorganize debts if you exceed the debt limitations listed above and do not qualify to file a Chapter 13 case. For example the Court filing fee for Chapter 13 is currently $310 while the Court filing fee for Chapter 11 is $1,717. Over five times as much just to file a Chapter 11 case.
The Chapter 13 forms are more standardized and most jurisdictions have a model Chapter 13 Plan that is supposed to be used by all parties and all parties are generally familiar with the model plan. Creditors do not have a right to vote on Chapter 13 Plans but can object to the terms of a chapter 13 plan if the plan does not meet the requirements of Section 1325(a) of the Bankruptcy Code. In Chapter 11 creditors can vote on the plan of reorganization and this process is expensive.
Bankruptcy attorneys and trustees in Chapter 13 cases rarely get paid for all their time and are coerced into indentured servitude to bankruptcy filers due to standardize fee schedules. Bankruptcy attorneys are coerced into accepting what are called “no look” fees that are not approved pursuant to Section 330(a)(4)(B), the bankruptcy attorneys’ statutory right to payment under the Bankruptcy Code, and are more or less indentured servants to the bankruptcy filers whims. For some reason attorneys that file bankruptcy for people are not supposed to get paid for their time like other areas of the law. If you diligent communicate with your client directly and answer every email, respond to every call and ask as many times as it takes for documents or information that are necessary and for your client’s benefit in the case you may or may not be compensated for this time. The number one complaint against attorneys is lack of communication but if you communicate too much look out. The process of getting fees approved pursuant to Section 330(a)(4)(B) of the Bankruptcy Code is a financial burden alone as well. An fee application has to be prepared, with a notice, declaration in support with timesheets detailing what every minute is based on. Some judges will request you appear in person guaranteeing that you cannot be fully compensated for your time given they limit the attorneys’ fees and costs of applying for compensation. Then the chapter 13 attorney has to get paid in many cases for years after the chapter 13 case is filed letting inflation and the time value of money eat away at turning a profit. As a result these unfortunate truths keeps debtors attorneys’ fees and costs in Chapter 13 cases at less than half of just the initial retainer most Chapter 11 bankruptcy attorneys charge for a similar reorganization in Chapter 11.
I have heard an argument that in the end bankruptcy attorney fees all even out because some cases do not require a lot of work and other cases require more. Basic statistics provide that this is not true for the vast majority of bankruptcy attorneys given the number of cases they file each year. It would take filing hundreds and hundreds of cases each month for a statistical mean like a coin flip actually being a 50\50 chance of heads or tails. Look it up since you probably do not believe me. Most bankruptcy attorneys are not bankruptcy mills but have small firms providing personal service to their clients as it should be. Where is this going? The debt limitations should be higher to allow more people to “adjust” their debts in Chapter 13 and not be forced into a more expensive Chapter 11 reorganization . . . . . .
Chapter 13 Trustee’s only get a percentage of the monthly Chapter 13 Plan payment so they too are forced to be indentured servants to the bankruptcy filer, or their attorney, and are forced to work for a set amount no matter how much work must be done in the Chapter 13 debt adjustment case…… These things are good for the Chapter 13 bankruptcy filer to keep the costs down though as compared to a Chapter 11 reorganization.
So while a typical Chapter 13 case will cost the bankruptcy filer between $4,000 to $6,000 while a typical Chapter 11 attorney retainer starts at $10,000 and the fees and costs only goes up from there plus United States Trustee fees….
Chapter 13 is a far better deal regarding costs than Chapter 11.
What Can Be Done To Fix The Problem?
The debt limitations need to be jurisdictional or county to county. It still will not be perfect. Nothing in life is but at least the debt limitations under Section 109(e) will be based upon circumstances that exist in that particular area and not some blanket limitation nationwide that cannot possibly serve its purpose. The cookie cutter approach creates discrimination and unequal results. It always will.