The Rise in Bankruptcy Filings for Older Individuals and Seniors

Since 2007, bankruptcy filings have doubled for those aged 55 and over. Despite being at a time in life where their children are out of the home and finances should be relatively stable, these older filers now make up about 20% of all people currently filing for bankruptcy relief. Compare that to the smallest group of bankruptcy filers, i.e. those aged 25 and less which account for less than 2% of all bankruptcy filers.

So why is it that older individuals and seniors make up such a disproportionate percentage of bankruptcy filings?

Seniors typically have lower, fixed incomes consisting of social security and possibly pension or other limited retirement income that is barely enough to meet basic living expenses without any wiggle room in the budget for savings for unexpected costs.  In the case of a couple where one spouse may still work full time, often one income is not sufficient to meet bills even with social security and a pension payment. This limited income makes it difficult if not impossible for seniors to get ahead of debt when unexpected temporary expenses and medical emergencies hit.

A quick—but perhaps ill advised—fix many seniors opt for is to refinance their home, pulling money out to pay off credit cards and medical bills and get a head of bills in the short term. But for those on a fixed income, this is a terrible idea on many fronts. First, it converts unsecured debts (which you can go bankrupt on) into secured debt (which you cannot bankrupt). Second, pulling money out of your home to pays creditors adds to the balance owed which in turn increases the monthly mortgage/home equity line payment. A higher home payment does not solve any problem when you are already struggling to make ends meet. Plus a refinance adds charges of several thousand dollars to your mortgage balance in addition to the money pulled out from the home.

Your better option is to explore the bankruptcy alternative. As a senior with limited income, your financial priority should be to protect cash flow by minimizing debt service so that you can afford for the long term to pay the necessary home mortgage and other monthly expenses. Your social security and pension payments may only incur marginal or nominal annual increases and retirement assets may one day be depleted. Best to see if you can discharge credit cards and other unsecured debts in bankruptcy, thereby preserving your future income and also your estate.

When Chapter 13 is a Better Option than Chapter 7

Chapter 13 may not be your first choice for a bankruptcy, and many people wrongly assume that the monthly chapter 13 plan payments is wasted money. While it’s true that unsecured creditors such as credit cards usually receive some distribution in a chapter 13 plan, in most chapter 13s only a small portion of dischargeable debts is actually paid back. There are often circumstances where chapter 13 provides other forms of bankruptcy relief in addition to a discharge of debt. In fact, chapter 13 offers many options that chapter 7 does not, including the ability to get a defaulted mortgage or auto loan out of default and back on track, or cram down an auto loan that is underwater (i.e., stripping the second mortgage), repay taxes and other priority debts, stop interest from accruing on credit cards, protect a co-debtor/cosigner from collection on a joint debt, and more.

Factors when Chapter 13 may be better for you than chapter 7:

As an ARAG legal insurance member attorney, Lynn Wartchow assists clients with ARAG legal insurance in filing chapter 13 bankruptcy cases in Minnesota. If you are considering filing bankruptcy and want to know what a chapter 13 plan would look like for you, Lynn offers free consultations and evaluations including how much you can expect to pay into a chapter 13 plan and what debts are resolved for that amount.

Inherited IRA’s May Be Exempt in Bankruptcy, Depending on from Whom the IRA was Inherited

One of the greatest areas of controversy regarding the exemption for individual retirement accounts (IRAs) is the inherited IRA. If a would-be bankruptcy debtor has inherited an IRA from a relative, as often happens between spouses and parents and children, can he or she exempt that IRA as if it were an IRA that they had funded? Or are inherited IRAs treated as most other inherited assets, subject to nominal, if any, exemption in bankruptcy? Whether a bankruptcy debtor may exempt an inherited IRA as one’s own IRA depends on whom they inherited the account from and what they did with the IRA upon inheritance.

Most IRAs are exempt when one files bankruptcy, meaning the retirement account is protected against creditor claims when a bankruptcy is filed. Stated otherwise, the debtor may file bankruptcy, receive a discharge of debts and keep their IRA account intact. This exemption for IRAs includes employer-sponsored IRAs, such as simplified employee pension plans (SEPs) and simple IRAs, as well as IRAs rolled over from 401(k), 403(b), or 457 (government) plans. While the exemption is currently limited at $1,171,650, the IRA exemption nevertheless applies whether the debtor elects the federal or Minnesota state exemption scheme. However a debtor should not to assume that all IRAs within the dollar limits are always exempt in bankruptcy, particularly if that IRA account was set up by someone other than themselves. In other words if the IRA is a result of a transfer, that IRA account may not be exempt in bankruptcy.

The availability of the exemption for an inherited IRA lies in from whom the IRA was inherited.  In 2014, the U.S. Supreme Court issued a decision in Clark v Rameker holding that inherited IRAs generally may not be exempted via the IRA exemptions provided under the Bankruptcy Code or state statute. However the case carved out an exception for IRAs inherited by a spouse. In essence, Clark v Rameker holds that while inherited IRAs are not exempt, there is a singular exemption for an IRA is inherited by one’s spouse (i.e., the bankruptcy debtor is the surviving spouse) provided the surviving spouse treats that IRA as if it is their own IRA by rolling it over directly into their own IRA. The rollover is critical to claiming the exemption, since by rolling over the IRA into one’s own account, the surviving spouse demarcates the IRA as one’s own IRA (i.e., not as an inherited IRA) under both the Internal Revenue Code and the Bankruptcy Code.

The opinion of Clark v Rameker, outlines the facts for creating the exception to the rule otherwise that inherited IRA’s cannot be exempted as one’s own IRA:

The third type of account relevant here is an inherited IRA. An inherited IRA is a traditional or Roth IRA that has been inherited after its owner’s death. See §§ 408(d)(3)(C)(ii), 408A(a). If the heir is the owner’s spouse, as is often the case, the spouse has a choice: He or she may “roll over” the IRA funds into his or her own IRA, or he or she may keep the IRA as an inherited IRA (subject to the rules discussed below). See Internal Revenue Service, Publication 590: Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014). When anyone other than the owner’s spouse inherits the IRA, he or she may not roll over the funds; the only option is to hold the IRA as an inherited account. Clark v. Rameker, 134 S. Ct. 2242, 2245, 189 L. Ed. 2d 157 (2014)

This reasoning in Clark v. Rameker aligns with the singular exception created in the Internal Revenue Code, which treats an IRA as “inherited” only when the individual acquired such account by reason of the death of another individual, and such individual was not the surviving spouse of such other individual. See 26 U.S.C. § 408(d)(3)(C)(ii). See also Internal Revenue Service, Publication 590: Individual Retirement Arrangements (IRAs), p. 18 (Jan. 5, 2014)(“If you inherit a traditional IRA from your spouse… you can… [t]reat it as your own by rolling it over into your IRA.”  This IRC reference was the exclusive basis for reasoning used by the Supreme Court in deciding against the debtor’s claimed exemption in Clark v Rameker, since the debtor in that case was not the surviving spouse of the IRA’s owner and therefore could not exempt the IRA no matter what she did.

What Partners and Shareholders Should Know about Personal Exposure When Putting Their Business in Chapter 11

In many small and medium-sized businesses, one or more of the partners or shareholders—also called equity security or equity interest holders—manage the day-to-day operations of the business. In this capacity, the partner is an acting principal of the business and, as such, often incurs personal liability for some—but rarely all—of the business debts by way of personally guaranteed security and loan agreements, personally guaranteed SBA notes or co-signed leases. A partner can also be held personally liable for some business debts usually owing to government and taxing authorities by way of statute, for example personal assessment for business taxes and even employee wages in some instances.

When a business files chapter 11, the question naturally arises what happens to the partner’s liability for business debts and what exposure does the partner face when his/her business files chapter 11. This articles attempts to address some of those concerns in the context of a privately held (i.e., not publicly traded) small or medium-sized business that files a chapter 11 reorganization proceeding. The term ‘partner’ is used interchangeably in this article with the concepts of equity ownership, whether that persona be a partner, principal or shareholder of the business depending on how it was formed or organized.

The Automatic Stay Protects the Business from Collection but Not Necessarily a Partner-Guarantor

Most people know that filing a bankruptcy proceeding invokes the sweeping protections of the “automatic stay”, which stays (i.e., legally stops) further collection efforts and pending lawsuits from proceeding. The automatic stay is one of the core principles of bankruptcy relief, as it affords the necessary time and relief from levies, repossession, evictions, expensive and burdensome lawsuits and other collection efforts in order for the business to come forward with a plan of reorganization. The automatic stay remains in place for the duration of any bankruptcy proceeding until such time the case is either dismissed or the plan of reorganization is confirmed or until the time that a party in interest, usually a creditor or landlord, successfully ‘lifts’ the automatic stay for cause granted by an order of the bankruptcy court. The grounds for relief from the automatic stay are not addressed in this article.

From a partner’s perspective, it is important to understand that there is no co-debtor automatic stay in chapter 11 proceedings. This means, for example, that a pre-bankruptcy lawsuit pending against both a business and its partner as co-defendants will be automatically stayed once the business files chapter 11. However the plaintiffs may still proceed against just the partner if they dismiss the lawsuit as to the business. Also this means that a partner can still be personally collected upon for existing judgments and still be personally assessed for business taxes in spite of the business bankruptcy proceeding. While personal collection efforts are often voluntarily put on hold by creditors when the business files chapter 11, the automatic stay nevertheless only applies to the business. For this reason, partners with significant personal guarantees may themselves need to file an individual bankruptcy proceeding.

The Chapter 11 Attorney Represents the Business, Not the Partners

It is a conflict of interest for the business chapter 11 attorney to render legal advice or formally represent the partners or equity security holders while representing the business. This can seem like an inconsistency when the partner maintains a primary, close and constant relationship with the business counsel. While it can be difficult for a partner of a closely held company to distinguish between the interests of the company and their own personal interests, occasionally events occur that could give rise to a conflict between what is best for the company and what is best for the partner. In all instances, however, the partner has a fiduciary duty to act in the best interests of the company and not himself, and the chapter 11 likewise has an obligation to represent the interests of the business alone. Due to this conflict of interest, partners may wish to consult with independent counsel on how their rights may be impacted by the business chapter 11 proceeding.

Personal Guarantees and Liabilities are Rarely Extinguished by the Chapter 11 Plan

The majority of chapter 11 plans do not allow for third-party releases or injunctions to protect guarantors, insiders and other non-debtor parties from lawsuits, collection efforts or otherwise. While there are exceptions to this general rule, partners and guarantors will need to find a resolution outside of the business chapter 11 proceeding.

Partners May Need to Contribute New Capital to the Plan Funding

Also called the Absolute Priority Rule, the general idea is that if creditors are going to take a financial hit, so should the partners.  The rule of thumb is that unless the plan proposes to repay all creditors in full, the partners must contribute new value in a reasonably equivalent amount to the value of the ownership interests retained. There are deviations on this rule, including that a partner may contribute new capital, cash or letters of credit to the business. The rule is not always enforced and

Other Risks: Preference Payments to Partners and Other Avoidance Actions

 Article V avoidance actions are fairly common in all chapters of bankruptcy, and particularly so in chapter 11 proceedings. Both partners and creditors alike can be subject to actions to avoid transfers of funds or assets so that those funds can be recovered for the benefit of the bankruptcy estate and unsecured creditors. While a reasonable salary paid to a partner for managing the business won’t necessarily be avoided, partner distributions and withdrawals made while the business was insolvent may be subject to avoidance. The general look back for avoidance actions is 90 days for non-insider creditors/other parties and up to one year for insiders such as partners, related companies and others having a close relationship with the debtor business. There are specific rules and limitations as well as affirmative defenses for preferences actions and transactions need to be evaluated on a case by case basis. Future compensation and salary to be paid to partners must also be disclosed in the chapter 11 plan and will need to reasonable and necessary or otherwise the plan could draw an objection.

Pros and Cons of Small Business Chapter 7 Bankruptcy

It happens to many small businesses: Operations and sales start slumping. While a few creditors offer forbearance of payments of even short-term extensions of credit, it’s just not enough. Perhaps the business grew too quickly for the principals to manage operational demands under an increased debt load. Perhaps the business model wrongly assumes receivables will be timely paid to keep the cash flowing as needed for debt service. Or the taxing authority has come knocking for prior unpaid withholding or sales taxes. Or a lawsuit naming the business as defendant has forced the principals to confront the business’s future viability considering the costs of litigation defense, the possibility of a significant monetary judgment or repossession of critical equipment.

There are many precursors to business insolvency, with some factors beyond the control of even the most assiduous of small business owners. It’s always a difficult decision for an owner who has invested their time and personal savings into a business to wind-down operations and mitigate the consequences of unpaid debts.

Unfortunately, the closing of a small business often means the owner should file a personal bankruptcy proceeding to discharge their personal guarantees. But should the business also file a chapter 7 bankruptcy? The answer may be surprising.

Pros of Small Business Chapter 7 Bankruptcy:

  • Orderly liquidation of business assets. A trustee is assigned to liquidate the remaining assets of the business and use the net proceeds after the trustee takes their cut to pay down the liabilities in order of priority. This process is especially useful if the business’s principals are unable to liquidate the business assets and there is significant inventory to be dealt with.
  • A trustee takes over all existing operations. A trustee will immediately be assigned to manage and control the remaining operations of the business, taking the burden off the business principals and owners to terminate employees and leases, surrender collateral to secured creditors, manage bank accounts, etc. This can also be viewed as a negative consequence by some small business owners (see below).

Cons of Small Business Chapter 7 Bankruptcy:

  • A trustee takes over all aspects of the business. A trustee will take over management and control of the business and the principals will be sidelined to simply watch and see what happens. This can be beneficial if the business is still operational and the principals no longer wish to manage the business through its winding-down, or can be viewed as a negative if the principals still have an interest in operating the business for some longer period of time and do not wish to see the business ‘go dark’ under the management of a bankruptcy trustee.
  • No discharge of debts. Unlike a personal chapter 7 bankruptcy, there is no discharge of debts at the end of a business chapter 7 proceeding. At the end of chapter 7, the business will simply be defunct, dead in the water and typically still owing liabilities.
  • Assets will be liquidated. Since a trustee will be liquidating the business assets, those assets are likely to be sold as quickly and cheaply as possible. This could mean a loss of equity in the assets. A fire sale by the trustee may also mean that personally guaranteed debts may not be minimized if assets are sold for less than the owner could potentially sell for herself/himself to pay down the debts.
  • Attorney and filing fees for chapter 7 can run into the thousands of dollars.
  • Personal exposure and risk to the business principals/owners. There is always a chance that a business chapter 7 filing will result in exposure to avoidance actions brought by the trustee against the owners and/or principals of the business. One common example is when the trustee sues a principal to recover for the benefit of the business creditors any distributions or draws taken by that principal in the one year prior to filing. For this reason, it is imperative that the business hire an experienced business bankruptcy attorney who can evaluate the risk and exposure faced by the principals/owners if the business files chapter 7 and their possible defenses. Note that if a principal is sued by the trustee, the principal must hire separate counsel since the business bankruptcy attorney cannot represent both the business and its principals.

There are other, non-bankruptcy issues surrounding the winding down of failed business enterprise which may require the services of a business attorney. Even if chapter 7 does not make sense for the business—as often it does not make sense especially for smaller businesses—the small business owner may still wish to be advised on how to resolve personally guaranteed debts, personally assessed taxes unpaid by the business, as well as how to navigate and avoid potential issues of alter ego should the owner wish to form a new business entity that is free and clear of any of the failed business’s debts.

For the small business owner that contacts my firm for assistance, I suggest the following steps:

  • The business owner should evaluate what business debts are personally guaranteed and/or may be personally assessed. Personally owed debts may include business credit cards, leases and personally guaranteed SBA loans as well as unpaid business taxes. The answer to this may lead the owner to seek out personal bankruptcy representation.
  • Should the owners attempt to wind down the business themselves, with or without the assistance of an attorney, or does chapter 7 bankruptcy offer any significant benefits in spite of the fact that there is no discharge of debts.
  • Have an attorney evaluate the exposure and risk to the business owner, either in the event that a business bankruptcy is filed or under certain circumstances, for example the owner took possession and control of business assets and funds to the detriment of its creditors.

Can a Divorcing Couple File a Joint Bankruptcy? And when it’s just not a good idea.

Divorcing couples can file a joint bankruptcy proceeding so long as they are still married on the date the bankruptcy petition is filed and, most importantly, when they agree to be completely cooperative and open about their finances with each other. The bankruptcy proceeding will not stay (i.e., delay) the divorce proceeding in most instances, so that both proceedings can happen simultaneously.

The benefit to a joint bankruptcy proceeding is the cost savings of one case instead of two but the couple must remain transparent for the duration of the proceeding including about their income and employment, finances and expenses, current living situation including any financial contributions and expenses of a new significant other, etc. There can be no secrets or confidences between the attorney and one of the two spouses that are jointly represented.  Even the most cordial of divorcing couples can turn sour when a disagreement arises in the divorce especially when it comes to the hot topics of spousal support, custody and division of assets.

Married couples can also file separate bankruptcy cases, and it is common for one spouse to file bankruptcy while the other spouse does not.

The ideal situation for a jointly administered bankruptcy case is when the divorcing couple is eligible to file a joint chapter 7 proceeding, which typically lasts three months start to finish. If the divorcing couple is not eligible for chapter 7, they can still file a joint chapter 13 however this is often can be impractical since most chapter 13 plans last five years.

There are also situations where one spouse (or both) may benefit from divorcing first, especially in a situation where one spouse does not qualify for chapter 7 without a support obligation in place. It becomes difficult and potentially a conflict of interest for the attorney when the best interests of one spouse conflicts with the other’s best bankruptcy plan. When any conflict happens, one spouse needs to seek separate counsel to file a separate bankruptcy case. If there’s any foreseeable conflict, it may be better to pursue separate bankruptcy proceedings from the start.

Generally to be eligible for chapter 7, the combined annual gross income must be no more than the applicable state median income for their household size. Under the “means test” calculation, it may still be possible for otherwise above-median debtors to qualify for chapter 7 when the divorcing couple maintains two separate households and when there are certain expenses and/or debts owed, including above-average health care costs, domestic support obligations, mortgage arrears owed, significant state or federal taxes are owed, and when there are mortgage or other secured debt payments that will be maintained. Sometimes eligibility for chapter 7 becomes possible after divorce, especially if the couple is still residing together now and one or both spouses only qualifies for chapter 7 once they have a smaller, separate household for the purposes of the means test.

Also see Bankruptcy and Divorce: What Should Come First

Why am I having a hard time refinancing after bankruptcy?

You filed a bankruptcy case to resolve your debts. So why aren’t you qualifying for a refinance on your home mortgage? The title company may be able to shed some light on specific problems but the common culprit may be misperceptions about bankruptcy.

It could be your credit score.

Most underwriting guidelines for new FHA mortgages and FHA home refinances require a minimum credit score of 640 and also waiting at least two years since the discharge order was entered in your chapter 7 case. If you filed a chapter 13, the guidelines require the 640+ credit score and also waiting a minimum of one year since the chapter 13 plan was confirmed with verification from the chapter 13 trustee that all plan payments have been timely made and other obligations have been fulfilled. Typically a credit score improves after bankruptcy since debts are then discharged and no longer reporting as in default. However it takes proactive work and time to improve a credit score, including maintaining current payments on mortgages, reaffirmed auto loans and student loans that survive the bankruptcy case. Pull your credit report at (note this site will not give you your credit score). Review the report for negative items. Challenge any inconsistencies or incorrect reporting information. Work to improve your credit by obtaining new credit.

Chapter 13 might be the problem.

If you filed chapter 13 case, it’s critical to understand that debts are not discharged until the plan is complete. Many people have the misperception that debts are discharged upon the chapter 13 plan being confirmed. However debts are not discharged until every obligation under chapter 13 plan is complete including all 3 to 5 years of payments being made. The reason for this is because if your chapter 13 case is dismissed before it is completed, those debts are resurrected subject only to any distributions that have been made by the chapter 13 trustee which reduce the balance owed. So if you are currently in a chapter 13 plan, your debts are still legally operative and owed by you until a discharge is received at the end of the plan. Additionally in chapter 13, the case is typically not closed until five months after you receive a discharge. This means that a chapter 13 case is technically open and active for up to 5 1/2 years, all the while impeding your credit score and your chances for qualifying for a refinance or new mortgage during that time. If you are still in an active chapter 13 plan, some lenders will require the chapter 13 trustee’s approval of the loan.

It could be the judgments obtained against you prior to filing bankruptcy.

While most judgment debts are discharged in bankruptcy (judgments for criminal restitution, child support and other domestic support, or even fraud are often not discharged), the state court system is not updated automatically with your bankruptcy information. In Minnesota, there is a secondary and optional process after you receive a discharge for having the state court docket updated to reflect the pre-bankruptcy judgments were discharged in bankruptcy. This process is called application for discharge of judgment and while it does not require the assistance of attorney, it is fairly affordable and certainly more convenient to have an attorney do this for you. Once the state court docket is updated with the bankruptcy discharge information, these judgments will reflect as discharged on your credit report. If you do not complete this process, the underlying debts are still uncollectible by law however the judgments are still shown as active on the state court docket and thus possibly also on your credit report.

When in doubt, look into your mortgage modification options.

As an alternative to a traditional refinance, consider applying under one of the federal mortgage modification programs. Low credit scores, judgments and even a bankruptcy are less likely to impact your eligibility for a mortgage modification than in qualifying for a refinance. As an additional benefit, the interest rates available through modification programs are often lower than what a poor credit score can achieve in the open market. There is also the added bonus of no refinance fees, since participating in a federal program involves no closing costs either out of pocket or added to your mortgage balance. The federal website that provides a comprehensive listing of all programs is available at

See also Qualifying for a Mortgage After (or During) Bankruptcy: What does it take and how long will I wait?

Qualifying for a Mortgage After (or During) Bankruptcy: What does it take and how long will I wait?

It should come as no surprise that qualifying for a new mortgage or refinance with a bankruptcy in your credit history is likely to complicate the process. But while a bankruptcy will stay on your credit report for a full ten years after your case is complete—which means up to fifteen years total for individuals who file chapter 13—bankruptcy takes its biggest bite on creditworthiness in the first two to three years after the case is first filed.

The good news is that bankruptcy does not automatically disqualify a borrower from obtaining a new mortgage or refinance, and the most available product after bankruptcy usually will be a FHA mortgage (as opposed to a conventional mortgage). The bad news is that eligibility for a mortgage will take time, usually two years or more with reestablished good credit.

As a general rule of thumb, a debtor can qualify for a FHA mortgage or refinance either during or after bankruptcy under the following guidelines:

Chapter 7 or Chapter 11 Bankruptcy: At least 2 years have elapsed since the date of discharge of debts and the borrower has a credit score at least a 640. In most chapter 7 cases, the discharge of debts is entered three months after the case is initially filed.

Chapter 13 Bankruptcy: At least 1 year has elapsed since the filing chapter 13 bankruptcy and the borrower has a credit score at least 640, plus the borrower can provide lender with a verified perfect payment history of their chapter 13 plan. Some lenders may also require the chapter 13 trustee’s approval of the loan.

Note: For conventional mortgage products and rural housing, the typical waiting period may be extended to three years or more and often with higher credit score requirements.

If you filed a chapter 7 or chapter 13 bankruptcy, or you are still in an active chapter 13 plan, work now to increase your odds to qualify for a mortgage product by doing the following:

  • Reestablish a good credit score now. The better the credit score, the lower the interest rate will be. While it won’t happen quickly, you do not have to wait until bankruptcy is complete to work on improving a credit score. Pay your mortgage, student loans, vehicle leases and auto loans on time each month so that you get the benefit of the positive credit reporting. If your student loan is in default, get it back on track with an Income Based Repayment program. Don’t let new debts and bills fall into collection. Check your credit report annually for errors that negatively impact your score. And consider a secured credit card or even a traditional credit card with a low limit—use it sparingly, keep the balance below 10% of the available credit limit or, better yet, pay it off in full each month. If your bankruptcy case is already complete, have the state court docket updated to show any pre-bankruptcy judgments were discharged in your bankruptcy case.
  • If you are in an active chapter 13 plan, ensure your monthly chapter 13 plan payment is made on time each month. For debtors with cash flow problems, this may mean that you set up your monthly plan payments to be automatically deducted from your wages or otherwise have your plan payment made via ACH deduction from a bank account.
  • Be prepared and be patient. At a minimum, most borrowers will have to wait at least two years from when a bankruptcy was filed before they will qualify for a FHA mortgage.

As an alternative for homeowners looking to refinance an existing mortgage who do not meet the underwriting requirements for a traditional refinance, the Making Home Affordable program administered through the federal government may offer a better solution. Obtaining a HAMP or HARP mortgage modification essentially provides the benefit of a cost-free refinance with market interest rates however without the strict credit score/financial history requirements or mandatory post-bankruptcy waiting periods. These programs will not exist indefinitely and as of the date of this post, Congress has approved the Making Home Affordable program only through the end of 2016. To identify the various programs and requirements for a mortgage modification, see the official HUD website on Making Home Affordable.

DISCLOSURE: This information is intended as a general guideline only and is not meant to be a definitive response on any individual qualification for a mortgage or refinance. Mortgage underwriting standards change frequently and only a banking institution or loan officer can determine eligibility for mortgage products.

The 2017 Chapter 13 Debt Limits (valid through 2019)

Effective April 1, 2016 and valid for all of 2017 and 2018, the debt limits for filing chapter 13 bankruptcy as prescribed by section 109(e) of the Bankruptcy Code are as follows:

Unsecured debt limit:            $394,725

Secured debt limit:                $1,184,200

These limits adjust every three years and the next chapter 13 debt limit adjustment will occur on April 1, 2019.

The secured debt limit of $1,184,200 includes the total of all debt that is secured by personal and real property owned by the debtor including mortgages secured by real estate (i.e., residential homestead mortgages as well as mortgages on rental or commercial properties, if any) and other collateralized debts such as vehicle loans, equipment loans, etc. The secured limit may also include tax liens.

The unsecured debt limit of $394,725 includes the total of all amounts owed on unsecured lines of credit, credit cards, medial debts and other consumer debts, some taxes owed and even disputed debts in most cases. This unsecured debt limit is calculated per person in the event that a married couple files a joint chapter 13 bankruptcy case.

Any individual that is either employed or self-employed in business is eligible for chapter 13 bankruptcy relief provided the individual’s unsecured debts are within these limits of $394,725 unsecured / $1,184,200 secured.

Individuals who exceed the chapter 13 debt limits still have the option to file under chapter 7 so long as their income qualifies under the means test, or otherwise may file an individual Chapter 11 proceeding, particularly for individuals with income-producing assets such as rental properties, valuable business interests and other property holdings that would be liquidated in chapter 7.

If you exceed the 2016 chapter 13 debt limits, read more about alternatively filing under chapter 11 at What is Individual Chapter 11 Bankruptcy and Why Would I file an Individual Chapter 11?

 Contact for a free consultation and more information on all your options available in bankruptcy. 

As an ARAG legal insurance member attorney, Lynn Wartchow assists clients with ARAG legal insurance in filing chapter 13 bankruptcy cases in Minnesota. If you are considering filing bankruptcy and want to know what a chapter 13 plan would look like for you, Lynn offers free consultations and evaluations including how much you can expect to pay into a chapter 13 plan and what debts are resolved for that amount.

2016 Minnesota Median Income effective for bankruptcy cases commenced on April 1, 2016 or later (estimated to be good through at least November 2016)

Median income is a critical measure in bankruptcy upon which the ‘Means Test’ calculation is largely based to determine whether a debtor qualifies for Chapter 7 bankruptcy versus Chapter 13. Essentially, if a debtor’s annualized gross income exceeds the median income for their household size and state of residence, they are generally (but not always) ineligible for Chapter 7 bankruptcy and instead steered toward a five-year Chapter 13 repayment plan.  In Chapter 13, median income also determines whether a debtor is required to do a 5-year plan (when above-median income) or 3-year plan (when below-median income).

It’s also important to note that annualized gross household income is determined by doubling all household income from all sources for the last six full calendar months prior to filing bankruptcy. Chapter 13 bankruptcy is a more likely outcome than Chapter 7when this annualized income is above the applicable state median income. The Means Test calculation and eligibility for Chapter 7 is more complicated than simply a measure against median income and other factors including mortgage payment as well as arrears, taxes owed and domestic support obligations, and a number of other factors also figure into the means test calculation.

As of April 1, 2016, the Median Income in Minnesota is as follows:

2016 Minnesota Median Income per applicable Household Size:         

1 Person          2 People          3 People          4 People          5 People

$51,260           $68,596           $80,900           $98,564           $106,964 

State median income is determined by Census Bureau data and adjusts at least annually. The latest adjustment is effective April 1, 2016 and the next adjustment date is expected November 2016.

To read more about Median Income and the Means Test, see What is the Median Income in Minnesota and How Does is Factor into Chapter 7 Bankruptcy and What is the “Means Test” and Why Does it Matter in Bankruptcy?

Wartchow Law Office is a law firm located in Edina, Minnesota with an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law, representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.