I usually ignore most “pop culture news”, but when there’s bankruptcy issues involved I will at least take a look. When news popped up about Lil’ Kim (aka Kimberly Denise Jones) filing a Chapter 13 bankruptcy, I immediately went to the New Jersey Bankruptcy Court’s website and pulled up her case (case #18-19397-VFP).
My first thought was: How on earth was she able to file a Chapter 13?
The reason this was the first question to come to mind was because Chapter 13 contains debt limits that will cause someone to not qualify to file bankruptcy under this Chapter based on the amounts of their debts. It is often due to these debt limits that you might hear of other celebrities or wealthy individuals filing under Chapter 11 which does not contain any debt limits. Chapter 13 is usually reserved for “regular folk”.
So how did she qualify? The short answer is: She didn’t.
Chapter 13 Debt Limits
The debt limits are for Chapter 13 are currently around $420,000 for unsecured debts and $1.2 million for secured debts. So if you have a mansion with a multi-million dollar mortgage on it or if you have hundreds of thousands of dollars in tax debts, then you won’t meet this qualification. This was Lil’ Kim’s situation and she was way over both of these debt limits.
It seems that she had filed a Chapter 13 bankruptcy to stop the foreclosure of her home, but didn’t have an actual plan of following through with it. Sure enough, pretty early in the case an objection to her Chapter 13 plan was filed by the trustee based on her being over these debt limits. But by then, she had already reaped the benefit that she was seeking: The Automatic Stay. The automatic stay stopped the foreclosure of her home and temporarily put her under the protections of the bankruptcy code.
*Note: At least in the Ninth Circuit, filing a bankruptcy for the sole purpose of invoking the automatic stay can be considered “bad faith” and may subject you to penalties.
Following the trustee’s objection to her plan, Kim voluntarily dismissed her case and acknowledged that she was over these debt limits and that she would seek alternative means to deal with her creditors.
Around this same time, Lil’ Kim apparently returned to the pop culture scene with a new TV show and a new album. She was able to get out of bankruptcy and presumably her financial situation has since stabilized. My interest in Lil’ Kim’s life has since dwindled.
Student Loans & Home Values
It used to be that these debt limits were of no concern to your average, every day person who seeks to file a Chapter 13 (or does not qualify for a Chapter 7). However, with increasing home values and the explosion of student loan debt (see graph below), this issue is popping up more and more as time goes on without a legislative fix.
In areas such as Orange and Los Angeles Counties, it is not unusual for someone to have a mortgage more than $1.2 million. It is also increasingly common that someone’s student loans pile up to more than $420,000. Not only can someone’s own student loans cause them to be over the debt limits, but now with Parent Plus, the costs of your children’s education could cause the same issue.
If you find yourself in this position, then your only bankruptcy options are Chapter 7 and 11. If you have secured debts that you need to restructure, such as getting caught up on a mortgage, then your options are narrowed down to Chapter 11 only. The problem is that Chapter 11 is far too complex for such a simple situation. There was recent legislation passed in February of 2020 that created a simpler form of Chapter 11, also known as Sub-chapter V, but this is restricted to “small businesses”. For now, there is just no easy way around the debt limit issue.
The HEROS Act
Although the HEROS Act (HR 6800) passed the House of Representatives in mid-2020, it was ultimately blocked in the Senate and was not passed. Had it passed, the debt limit issue would have been all but eliminated. The Act provided as follows:
Bankruptcy Protections – EXPANDED ELIGIBILITY FOR CHAPTER 13 —Section 109(e) of title 11, United States Code, is amended–(A) by striking “$250,000” each place the term appears and inserting “$850,000”; and(B) by striking “$750,000” each place the term appears and inserting “$2,600,000.”
Many of the dollar amounts in the Bankruptcy Code are adjusted for inflation, including these debt limits. However, it is not clear whether adjustments to these new amounts would have been adjusted once enacted, or relating back to an earlier date. Either way, these new amounts would have effectively eliminated the debt limit issue for your average person seeking bankruptcy relief.
The bill that did ultimately pass and was enacted in December of 2020 (with the uninspired name “Consolidated Appropriations Act, 2021”) did not contain any changes to the debt limits.
My Letter to Congress
I am fortunate to have a representative for my district in Congress who actually responds to their constituents. The representative for the 45th District of California is Katie Porter who was formerly a bankruptcy law professor at the University of California, Irvine, and actually helped write one of the 3 main bankruptcy law text books. She is also the protégé of Elizabeth Warren, United States Senator and also formerly a bankruptcy law professor and also helped write one of the other three main bankruptcy law text books.
I previously wrote to Katie about Chapter 7 trustee’s fees and I received a nice handwritten letter from Washington DC from her staff.
On the issue of the §109(e) debt limits, this was her response:
“Dear Mr. Heston, Thank you for contacting our office about Section 109(e) Chapter 13 debt limits. I appreciate that you took the time to contact Congresswoman Porter. Your thoughtful questions and suggestions help the Congresswoman better understand the needs of our community. I agree with you that Congress must act with urgency to address the affordable housing crisis and the rising costs of college and skyrocketing student debt, both of which impact how Orange County families file their taxes. Congresswoman Porter agrees as well. She is committed to committed to fighting for safe and affordable housing, and addressing the debt crisis. Please know that I have passed your message along so that Congresswoman Porter can keep your suggestions in mind.“
Hopefully other people in Congress are made aware that this is such an important issue. With so much major legislation being proposed these days, I wouldn’t be surprised if this was fixed in the very near future.
