When considering bankruptcy, many debtors will opt for court protection and reorganization of debt through a Chapter 13 filing. However, many of these debtors and even some lawyers are unaware of the debt limits that may keep them from being eligible for this particular process.
As of April 1, 2013, limits on the amount of debt that can be reorganized under a Chapter 13 bankrutpcy have been increased to $1,149.525 for secured debt and $383,175 for unsecured debt. While this may sound like a lot of money on both counts, these limits can cause particular distress to real estate investors who may have easily exceeded these amounts by buying several properties during the recent real estate boom and now find the value of these properties seriously deflated in the aftermath of the real estate bust. For properties purchased subject to mortgages, or commercial properties where the debtor personally guaranteed repayment of the mortgage, the debtor may very well find that his or her secured debt now exceeds the above limit with no way to recoup the loss following the deflated value of the properties.
In cases such as this, many people are looking for alternative forms of assistance when they do not qualify for Chapter 13 bankruptcy. There are not a lot of practical solutions for real estate investors in this situation. In extreme cases, it may be possible to wait until one or more of the properties in question are foreclosed upon, taking the mortgage loan(s) out of the picture for secured debt calculations. The problem with this scenario is that the deficit left after the property is disposed of may raise the amount of unsecured debt involved until it has gone over the allowed limit.
Another option that may well be the only option for many is to pursue a Chapter 11 commercial bankruptcy. Chapter 11 is similar to Chapter 13 bankruptcy in that in involves a reorganization of debt into a more accessible repayment plan but without the debt ceilings. However, as Chapter 11 is a commercial option rather than personal, it is correspondingly more complicated and expensive to pursue. Even though Chapter 11 is considered a commercial option, it is open to anyone exceeding the debt limits of Chapter 13. Real estate investors in particular caught up in the turbulent real estate market of the past decade may well find that their path to bankruptcy protection leads only to Chapter 11.