In the Chapter 13 bankruptcy case of Brammer, William H. Jr. and Heili K.; In re, the bankruptcy court ruled against a bankruptcy trustee who wanted to have the debtors' case dismissed because their secured debt was above Chapter 13 bankruptcy's debt ceiling.
The details of the bankruptcy case:
The Chapter 13 debtors disclosed no unsecured debt and secured debt of $219,647 secured by collateral - their home and vehicles - worth $752,500. Despite the debtors' disclosures, a proof of claim of $1,019,830 secured by the debtors' principal residence was filed. The trustee asked the court to dismiss the case for numerous reasons. In this ruling, the court rejected the trustee's assertion that the debtors' case should be dismissed because their secured debt exceeded the maximum for Chapter 13 eligibility. Applying Section 506(a), the court said that the debtors' secured debts could not exceed the value of their collateral, which was less than the secured debt ceiling. Because the balance of the debtors' obligations in excess of the collaterals' value did not exceed the unsecured debt ceiling, the court ruled that the debtors were eligible for Chapter 13 relief.
Because the debtors' property was worth less than the proof of claims against it, the amount of the claims above and beyond the value of the property would not be considered a secured debt. For example, if the above mentioned debtors had a creditor with a proof of claim of $1,019,830, then everything above $752,500 would be considered an unsecured debt during bankruptcy. On the other hand, if the value of the debtors' property had exceeded the debt limits of Chapter 13 bankruptcy, the trustee would have been allowed to dismiss the debtors' case.