This article seeks to provide a basic overview of the change to eligibility for Chapter 13 Bankruptcy for the Family Lawyer. It covers the minimum of what the family lawyer may need to know limited to this issue. See, The Family Lawyer’s Guide to Bankruptcy, published by the Family Law Section of the American Bar Association, for a more detailed review of the intersection of bankruptcy and domestic relations (subject to this adjustment and to another Congressional change to Chapter 11). If these issues arise in a case or appear as if they may arise in a case, the author suggests that you consult with a bankruptcy professional.
Section 109 of the Bankruptcy Code has “debt limits” and eligibility requirements for “Who may be a Debtor” under the various Chapters, including Chapter 13, which is for individual reorganization over a three-to-five-year period. The significance of Chapter 13 for family lawyers is that it is the only Chapter of the Bankruptcy Code that enables a Debtor to discharge, that is release, or enjoin from collection, a non-support obligation pursuant to 11 U.S.C. §1328(a)(2) (which only excludes from discharge those debts arising under 11 U.S.C. §523(a)(5) for a domestic support obligation but does not exclude from discharge those debts arising under 11 U.S.C. §523(a)(15) for other divorce-related obligations).
Previously, the debt limits for eligibility for a Debtor to proceed under Chapter 13 were relatively narrow. The provision specified that an individual debtor, who must have regular income, had to hold a certain amount of noncontingent, liquidated, unsecured debts of less than $419,275.00 and noncontingent, liquidated, secured debts of less than $1,257,850.00 (with the limits adjusting every three years). 11 U.S.C. §109(e). On June 21, 2022, President Biden signed the law enacted by Congress amending this provision to eliminate the distinction between secured and unsecured debt and increasing the total debt limit to $2,750,000.00. Therefore, an individual debtor with regular income and “noncontingent, liquidated debts of less than $2,750,000” (which will continue to adjust every three years) is now eligible to file a Chapter 13 case and seek to discharge settlement agreements that are not, actually, in the nature of a domestic support obligation. The legislation will “sunset” in two years and the eligibility limits of Chapter 13 under 11 U.S.C. §109(e) will revert to the prior limits if the statutory change is not extended or modified.
The important “take away” for family lawyers is that this opens the doors to those settlement agreements involving significantly larger debt. proceeding) andthat the distinction between property settlement and support in agreements becomes much more important and that taking action in a Bankruptcy Case once filed becomes critical as there are strategies that may be implemented prior to confirmation of a Chapter 13 plan that should be considered and possibly pursued to protect a client’s interests, including, but not limited to: filing a proof of claim, objecting to confirmation of the Plan, discovery such as a Rule 2004 examination, including obtaining documents (e.g. continuing discovery that may have taken place in the divorce proceeding) and the filing of a complaint to determine if the debt is a domestic support obligation or may fall into another non-dischargeable category. It is wise to pay attention once a Chapter 13 case is filed by the opposing party. If it is your client who files, any past due fees come under the Chapter 13 Plan, subject to discharge, but that is a different article altogether.
