I suppose all of life is mutable; can't claim law's special in that respect. Medicine advances, technology transforms, art adapts to tastes (or tastes adapt to art): everything changes. Some changes are good (the 2005 Ford Mustang), some changes are poor (the 2010 Ford Mustang: a new bulbous derriere?) and some changes are wanting, as in an end to vehicle spoilers: take ye car wings and get the flock out.

Law is fluid and in Bankruptcy Land there's no ground for complacency. Know that a change is always gonna come. Here's one change, but first you'll suffer some preamble.

By now we've learned the basic difference between chapter 7... and chapter 13. (Can't stop my compulsive Jack Bauer clock-reading pause). In the former, you discharge debt sans payment. In the latter, you commit (an often small) monthly payment, usually pennies on the dollar of your debt. Today we talk thirteen, chapter 13. For your consideration, the curious case of Benjamin Barrette. Ben's pappy had built a local barrette factory: he made the finest domestic clasps to pin down ladies' hair... and yarmulkes. But such a domestic product could not survive the modern global economy. Benjamin failed to sustain the barrette business and fell heavily into personal debt. So he swung by my office back in December 09. We shook hands, confirmed the weather conditions and I waited to listen. For a good while we just ended up discussing how life could be pretty backward sometimes. Ultimately, talk turned to bankruptcy: Ben needed debt relief. He'd come to the right place. We considered chapter 7 bankruptcy, but despite business woes, Benjamin's income remained pretty high. He could not qualify for chapter 7 debt relief. We turned to chapter 13: a 60-month payment plan that would be fair and manageable: he would pay what he could and 5 years later, he'd be forgiven the balance of his unpaid debt. But we hit a stumbling block.

A person cannot do a chapter 13 if his debt exceeds certain thresholds. As of April 1, 2010, one is not eligible for chapter 13 relief if one's unsecured debt is equal or greater than $360,475; and the limit on secured debt is $1,081,400.

You'd think it wouldn't be a frequent issue: those are pretty high limits. But in this downturn, it is not uncommon that persons' unsecured debt equals or exceeds $360+. However, the definition of unsecured debt is determinative.

Mortgages are taken out as secured debts guaranteed by the lender's lien on the debtor's real property. However, the security interest is compromised by the property's depreciation. In our case, Benjamin's home is worth $300K and the mortgage is $661K. The mortgage debt is essentially bifurcated: $300,000 of the $661K mortgage is secured, and $361 has become unsecured. If that unsecured portion is counted toward the unsecured debt limit, that would preclude Benjamin's chapter 13 bankruptcy.

Thus, it appeared we had fallen between the cracks of chapter 7... and chapter 13. Which reminds, me Jack is on tonight and even President Obama is watching. But....

In mid-January 2010, I picked up the horn and buzzed Benjamin. A significant decision had been rendered in In re Munoz, a S. District of CA case. The Court ruled that in the case of a partially-secured mortgage, all of that mortgage would count as secured debt. Thus, Benjamin would owe $661K in secured debt, well within the chapter 13 threshold. We went ahead and filed the chapter 13.

Note: suppose Benjamin's $300K home had a first mortgage of $350K and a second mortgage of $361K. The entire $350K primary mortgage would count as a secured debt. However, the entire junior lien would count as unsecured debt and would yank Ben out of chapter 13.

We know by now from my many past disclaimers that this too is not legal advice. Moreover, it's district-specific. It should not be relied or acted upon, since exceptions may apply.