Most people have had no difficulty meeting the debt limitations for chapter 13. As of April 1, 2010, an individual was eligible for chapter 13 with no more than $1,081,500 in secured debt and no more than $360,525 in unsecured debt.
Much has been written as to whether a debt is contingent or not, or liquidated or not, so as to be counted for purposes of chapter 13. Much has been written on whether an individual has regular income. Little has been written about regarding who is an “individual” for purposes of chapter 13. Why is this important?
Section 109(e) of the Bankruptcy Code, 11 U.S.C. § 109(e), provides:
Only an individual with regular income that owes, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts of less than $360,525 and noncontingent, liquidated, secured debts of less than $1,081,500 or an individual with regular income and such individual’s spouse, except a stockbroker or a commodity broker, that owe, on the date of the filing of the petition, noncontingent, liquidated, unsecured debts that aggregate less than $360,525 and noncontingent, liquidated, secured debts of less than $1,081,500 may be a debtor under chapter 13 of this title.
Who or what is an “individual” for the purposes of this provision? What happens if one spouse has debts less than these limits and the other spouse has her own debts that are also less than these limits? What if the total debt of both spouses is in excess of these limits? And what if the joint debt of the spouses together is relatively small?
Put another way, may an individual and that individual’s spouse, each of whom have debt less than the pertinent limits for chapter 13, file a joint case where the aggregate of all of their debt is greater than the limits for chapter 13?
This issue is now pending in the U.S. Bankruptcy Court for Northern District of Illinois, where the trustee has moved to dismiss, asserting that the debtors may not be joint debtors under chapter 13 where their combined debt exceeds the debt limits for an “individual” in chapter 13. On behalf of the debtors, we contend that each individual is a separate debtor and each debtor’s filing and eligibility is to be determined separately, even though they filed joint cases that are jointly administered.
The Code does not clearly articulate the debt limits in chapter 13 for married couples with separate debt who choose to file jointly. Bankruptcy Code § 101(3) defines an “individual with regular income” as an “individual whose income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 13 of this title, other than a stockbroker or a commodity broker.” Therefore, when Bankruptcy Code § 109(e) refers to an “individual with regular income and such individual’s spouse,” it would appear to apply to situations where a joint debtor is not an “individual with regular income” and therefore ineligible for chapter 13. In re Werts, 410 B.R. 677, 687 (Bankr. D. Kan. 2009). See also In re Johnson, 400 B.R. 639, 643 (Bankr. N.D. Ill. 2009) (in analyzing definition of “current monthly income,” court considers that distinction “between ‘debtor’ and ‘debtor’s spouse’ in a joint case conflicts with other provisions of the Code that treat both joint filers interchangeably as ‘debtors’”). But see In re Weiser, 391 B.R 902, 908 (Bankr. S.D. Fla. 2008) (“Section 109(e) clearly provides that husband and wife debtors filing joint petitions are limited to $336,900 in total unsecured debt.”).
Werts distinguished Weiser due to the difference in procedural posture. In Weiser, the debtors filed a chapter 13 and a creditor objected to confirmation due to their lack of eligibility under § 109(e). At the confirmation hearing, debtors’ counsel made an oral motion to bifurcate the husband and wife’s case, presumably to cure the defect in eligibility. The court held that doing so was untimely and bifurcation of a case was not procedurally possible. 391 B.R. 902. But see In re Butler, No. 10-00317, 2010 WL 2035373 (Bankr. D. D.C. May 21, 2010) (holding joint chapter 13 case could be severed to cure ineligibility defect).
In Werts, the debtors filed a chapter 7 case, in which debt limits do not apply, and ultimately filed a motion to convert to chapter 13. Since the issue of eligibility arose at the time of the motion to convert and a plan had not yet been filed, the court felt that the facts could be distinguished from those in Weiser. 410 B.R. at 687. However, the procedural posture of the case in Werts was not outcome-determinative to the substance of the holding as the court went on to interpret how § 109(e) should be read.
A pragmatic reading of § 109(e) in our view is the better rule and is in line with recent decisions issued by the Supreme Court. See Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (2007) (holding conversion under § 706(a) not absolute despite Senate and House Committee Reports to contrary, but looked to implicit language in §§ 706(d) and 1307(c) for denying conversion due to debtor’s bad faith), United Student Aid Funds Inc. v. Espinosa, 559 U.S. ___, 2010 WL 1027825 (U.S. March 23, 2010) (holding that student loan debts could be discharged without undue hardship determination as required by § 523(a)(8) and Rule 7001(6) due to instructions in § 1325(a) that a bankruptcy court “confirm a plan only if the court finds, inter alia, that the plan complies with the ‘applicable provisions’ of the Code.”), and Hamilton v. Lanning, 560 U.S. ___, 2010 WL 2243704 (June 7, 2010) (holding that “projected disposable income” allows bankruptcy courts to account for changes in the debtor’s income that are “known or virtually certain at the time of confirmation” instead of using “current monthly income” calculated by § 101(10A)(A)(i) minus expenses calculated by §§ 707(b)(2) and 1325(b)(3)(A) to determine projected disposable income).
BAPCPA evokes the policy choice of Congress favoring chapter 13 over chapter 7. To limit the debts of married couples to the same amount as individuals does not encourage chapter 13 filings. Werts, 410 B.R. at 688. Debt limits for joint debtors should not simply be doubled. As Colliers on Bankruptcy §109.06[4] (16th Ed. Rev. 2010) states:
[I]n come cases, adding the debts of a spouse will cause those debts to exceed the statutory limits, and the limits are not doubled in a joint case. In such cases, only one spouse may be able to file as a chapter 13 debtor. Alternatively, if few of the debts are joint, each spouse may be eligible to file a separate chapter 13 case.
We believe that debtors who are each eligible to file their own chapter 13 case, however, should be able to file a joinly as authorized by Bankruptcy Code § 302(b). Werts, 410 B.R. at 688. This is because § 302(b) establishes that the commencement of a joint case creates two separate estates. “The court shall determine the extent, if any, to which the debtors’ estate shall be consolidated.” Therefore, “each joint debtor has a separate estate unless the two estates are substantially consolidated under § 302(b).” In re Banker, 205 B.R. 125, 134 (Bankr. N.D. Ill. 1997) (citing Ageton v. Cervenka (In re Ageton), 14 B.R. 833 (9th Cir. B.A.P. 1981).
Even though debtors here could each file separate chapter 13 petitions, this would elevate form over substance by forcing them to pay additional court and attorney fees for separate petitions. This could reduce funds available for creditors due to increased administrative expenses. Werts, 410 B.R. at 688.
We urge chapter 13 trustees to encourage joint debtors to file chapter 13 cases under these circumstances and avoid needless motions to dismiss resulting in the need to file two separate chapter 13 cases and motions for procedural consolidation.