Last week the President Biden signed a much-needed update to the Bankruptcy Code regarding debt limitations. For chapter 13 debtors, the Bankruptcy Code has maintained debt limits with built-in increases to account for inflation. Specifically, as of April 1, 2019, the unsecured debt limited was $419,275, and the secured debt limit was $1,257,850. Examples of unsecured debts are credit cards, rent arrears and personal injury claims before a judgment is entered. Examples of secured debts are home mortgages, car loans and lawsuits that result in judgments entered in a county where the Debtor has property. The law increases the total debt as of the petition date to $2,750,000. While the previous Code provisions had separate limits for unsecured and secured debts, the new $2,750,000 debt limit applies to the combined unsecured and secured debts.
Even with the built-in increases, the debt limits had become woefully insufficient, which meant that more individuals would be forced to file a chapter 11 in place of a chapter 13. While chapter 11 is available to individual debtors, in practice, it is more cumbersome. The substantially higher cost of filing under chapter 11 is not often justified by any benefits that chapter offers over a chapter 13. Therefore, Congress’s increase to the debt limit is a welcome modification for individual debtors.
For small business debtors who benefited from the streamlined “sub-chapter V” chapter 11 provision, the $7,500,000 debt limit, which had expired March 27th, was extended.
Unfortunately, the increases outlined above both sunset–or expire–two years from the law’s enactment.