Despite BAPCPA, the 2005 “reform” that made bankruptcy more complex and more expensive, consumer bankruptcy is working fairly well in Northern California.
The bar has learned to navigate the new law, shuffle the additional forms and avoid the events of “automatic dismissal”.
We only need one little change to the law to make relief from the consequences of the Great Recession available to a hunk of the Silicon Valley middle class now excluded. We need an increase in the Chapter 13 debt ceilings.
Only Chapter 13 of the available chapters limits who can file a bankruptcy case by the size and composition of their debt. Adjusted tri-annually, today a Chapter 13 filer’s secured debt cannot exceed $1,081,400 and unsecured debt of $360,475.
You might ask how could a limit of $360,475 not cover most people’s unsecured debts, which are usually credit cards, personal loans, and medical bills? Because the home equity loans that are now underwater are counted as unsecured, despite the fact that there is a lien on the debtor’s home, are added to the unsecured debt total.
Shrunken home values have left a large swath of Silicon Valley homeowners with HELOC’s no longer secured by equity. When the HELOC balance is added to the usual array of credit cards and student loans, it’s not hard to run over the $360,475 limit.
Chapter 13 has features unique among the chapters of bankruptcy that make it important for families trying to reorganize their finances. In Chapter 13, you can cure mortage arrears, catch up on taxes or family support, and most importantly these days, strip off mortgage liens that aren’t attached to actual value in collateral.
I would argue that the debt limits in Chapter 13 are no longer meaningful at all and ought to be doubled or tripled to cover a wider group of consumers. Before BAPCPA, Chapter 13 had some very special and more advantageous provisions, sometimes called the super discharge. Chapter 13 was seen as a privilege and because creditors have less influence in Chapter 13 than they do in Chapter 11, the other reorganization chapter, debt limits struck a balance between the rights of debtors and creditors.
With “reform”, Chapter 13 has become the presumptive norm. The means test is designed to push people from Chapter 7 to Chapter 13. The super discharge was largely gutted by BAPCPA.
There seems little reason to choke off entry to Chapter 13, unless of course the unspoken intent of the Congress is that the middle class should soldier on, swamped by debt it can never repay because “people should pay their debts.”
There are work arounds for families who are not eligible at the outset for Chapter 13, including single spouse filings and Chapter 20 (a 7 followed by a 13). But they are more expensive and inefficient than raising the debt limits for Chapter 13.
