Calculating Values for 109(e) Bankruptcy Eligibility

Posted by NCBRC - February 10, 2022

In the face of a good faith challenge to the debtors’ eligibility for chapter 13 bankruptcy under section 109(e), the bankruptcy court considered evidence beyond the debtors’ schedules and conducted its own eligibility calculation. In re Beach, 2022 Bankr. LEXIS 313, Case no. 21-10762 (Bankr. D. N.M. Feb. 7, 2022).

Creditor, Iron Horse Welding, LLC., had a judgment against debtor, Jody Beach, for $325,000. The debt was secured by a junior lien on the debtors’ house. The home was also security for a senior mortgage in the amount of $340,699. When the debtor and his wife filed for chapter 13 bankruptcy, they listed the value of the home as $538,000, and claimed a $120,000 homestead exemption. The debtors also listed on their amended bankruptcy schedules $148,174.31 in unsecured debts. Pursuant to these calculations, the debtors listed their total unsecured debt as $395,873.31.

Iron Horse moved to dismiss the debtor’s bankruptcy case arguing that their debts, in fact, totaled $430,102.88 and therefore exceeded the $419,275 statutory limit under section 109(e).

Reviewing the creditor’s motion, the court noted that while some courts rely on the debtor’s schedules when determining bankruptcy eligibility under section 109(e), the Tenth Circuit in In re Murphy, 146 Fed. Appx. 285 (10th Cir. 2005) (unpublished), favored independent assessment by the court in the face of a good faith challenge. Likewise, the court in In re Garcia, 520 B.R. 848 (Bankr. D.N.M. 2014), held that, “while a debtor’s bankruptcy schedules are an important part of the § 109(e) eligibility analysis, the Court is not bound by them, even if they were submitted in good faith. Rather, the Court should be able to consider all readily available evidence, including claims filed, any liens that are obviously avoidable, and the like.”

The dispute here centered around the value of the debtor’s home. Iron Horse argued that it should have been valued at $536,000 rather than the debtors’ stated value of $538,000. The lesser value argued by the creditor would reduce its secured portion of the lien and increase the unsecured portion such that the debtors’ unsecured debts would exceed the debt limit.

The court held an evidentiary hearing at which the parties presented competing expert testimony with the debtors’ witness valuing the house at $549,000-$550,000 and Iron Horse’s witness testifying that its value was $515,000. The court found both expert witnesses to be credible and their estimates to be within 7% of each other. The court began by splitting the difference to a value of $532,500. It went on to take into account the “red-hot” real estate market, a factor not adequately considered by Iron Horse’s expert. Based on that consideration, the court found the value of the house to be $540,000.

Subtracting the first mortgage and the homestead exemption, the court found the remaining value in the house left $78,528 secured by Iron Horse’s junior mortgage. The remaining balance on the lien of $247,941.18 was unsecured.

The court then walked through the remaining claims in the debtors’ bankruptcy to determine which were unsecured, non-contingent and liquidated for purposes of calculating section 109(e) eligibility. Based on these calculations, the court found the debtors had $371,521.60 in unsecured debt. With the cap at $419,275.00, the court found them eligible to be chapter 13 debtors.

It denied Iron Horse’s motion to dismiss.

Beach Bankr N Mex Feb 2022


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