Is This Debt Secured? How To Determine If You Qualify For Bankruptcy Under The Chapter 13 Debt Limits.

For those of you filing for Arizona chapter 7 bankruptcy protection, please stop reading now. No, this isn’t confidential information for members of some secret club – so don’t feel left out. However, I am going to say a few things about the Chapter 13 bankruptcy secured debt limit, and I don’t want to confuse anybody. The last thing I want is to get a frantic phone call from a chapter 7 bankruptcy clients, 5 minutes after this post is live.

What are the chapter 13 bankruptcy debt limits? An individual can file a Chapter 13 case if they have non-contingent, liquidated unsecured debts LESS than $336,900 and non-contingent, liquidate secured debts of LESS than $1,010,650. Note that these values are not set in stone, they change every few years based on the changing economy.

It has been my experience that the secured debt limit is more often a problem than the unsecured. How can that be when the secured debt allowance is roughly 3x that of the unsecured? There are two reasons. The most obvious is that high ticket items such as homes and cars are secured forms of debt. In addition, there are additional categories of secured debt that are often overlooked.

So, what types of debt are secured? I have already mentioned the typical home mortgage and car loan – these are pretty easy to understand. The creditor financing these loans generally retains a security interest in the property so that they have recourse in the case of default. Below you can find a discussion of debts less commonly understood to be secured.

Purchase Money Security Interests:

These security interest are lien rights that the seller retains in the goods purchased when the seller finances the purchase. Want me to simplify? This means that, when you finance an item and a PMSI is formed, the financing company has a right to the item(s) purchased in the case of default. Note that the lien can be expicitly created by a specific written agreement or more commonly may covertly arise when the item is financed on the seller’s revolving credit plan or store credit card. 

What does this mean? Well, for one, it means that any time a client of mine includes a Best Buy credit card on their petition, I get notice that the debtor must wither relinquish the property or may the secured debt. How can this be? The presence of the PMSI means that, in theory, if the buyer discharges his personal liability on the debt through bankruptcy, the seller retains the right to reclaim the goods. 

In general, your big box retailers have wised up and have structured their store credit cards as PMSI. This includes Sears, Good Guys, Circuit City and Zales credit plans give the seller a security interest in the goods purchased. Contrast this with your typical MasterCard or Visa, where their are no liens attached to the items purchased.

Fortunately, for most debtors the items purchased have little value. This means that creditors with purchase money security interests in consumer goods almost never file a law suit to enforce their interest in the goods. It is more of a scare tactic than anything else.

Tax Liens

Tax liens are a formed of secured debt. The recordation of a tax lien perfects a lien on all of the taxpayer’s property, real and personal.  It is a statutory lien, so cannot be avoided as a lien impairing an exemption under § 522(f), remember that certain liens can be avoided in bankruptcy to the extent that they impair an exemption.

Unfortunately, only judicial liens (like a judgment or a garnishment), or a non possessory, nonpurchase money security interest in household goods or tools of the trade are avoidable. It is also important to keep in mind that, not only are tax liens secured, but they may attach to assets beyond the reach of other creditors (i.e. retirement savings and 401(k) plans).

Judgement Liens

A judgement lien may or may not be a secured debt, depending on your state laws. In many cases, a judgment does not automatically create a lien and, to create one, the creditor must record the judgment with the designated agency.  

Because I would hate to give readers in Chattanooga or Kalamazoo misleading advice, I ask that you check with an experienced bankruptcy attorney regarding the laws of your state to determine how judgment liens are perfected.  In addition, you can also contact the secretary of state and request a report of liens on file to determine the presence and seniority of any liens present.

If you have been paying attention, you may remember that I mentioned judgement liens above, in my brief discussion of avoiding liens in bankruptcy. It is possible for judgement liens to be avoided in bankruptcy. So there, I have given you even more incentive to correctly determine the status of any judgements and the presence or absence of associated liens.

Well, I am beat. There are surely more we could talk about – creditors are pretty sneaking about finding ways to ensure they receive proper compensation for their goods or services. Case in point – have you heard about the New York law firm securing payment from clients with second mortgages? Yep, if you don’t pay your lawyer they can foreclose on your home. Messy, if you ask me.