Too Much Debt Forces Trader Out of Chapter 13
It’s never a good thing when you owe money to the federal government. While that doesn’t come as a big surprise to most of us, the story of a Michigan stock broker reminds us yet again that Uncle Sam can and will play hard ball. Debtor Douglas Frederick was found to have violated securities laws and filed for chapter 13 bankruptcy protection to try to mitigate a $956,448.99 tab owed to the SEC partly as a result of a disgorgement order for trading violations.
Bankruptcy Code Section 109(e)
The SEC challenged Mr. Frederick’s bankruptcy on the grounds that he exceeded the unsecured debt limit of section 109 of the bankruptcy code. Indeed, section 109 (e) of the bankruptcy code imposes a debt ceiling on those seeking relief in chapter 13 bankruptcy. Debtors with more than $360,475 of unsecured debt are not eligible for Chapter 13 relief. Similarly, the bankruptcy code imposes a limit on the amount of secured debt the chapter 13 debtor can have with the maximum currently set at $1,081,400.
With Mr. Frederick’s SEC disgorgement order alone totaling $463,491.13, the SEC made the case that his unsecured debts were too high for chapter 13 bankruptcy. Mr. Frederick countered by arguing that he was assured that entering into a consent decree regarding his SEC trading violations would mean that the SEC would not pursue him for his government debts. Since enforecement was uncertain, he listed them in his schedules as unliquidated. In rejecting this argument, the Michigan court found that a debt is considered certain and therefore liquidated where:
Its value can be readily ascertained whether or not the debtor’s underlying legal liability on that claim is in dispute.
The Court held that since Mr. Frederick knew the amount of the debts he owed to the SEC, he could not in good faith list them as unliquidated. To the contrary, the debts had been assessed as part of a consent decree, were therefore unlikely to be successfully challenged and pushed Mr. Frederick’s unsecured debt load above the maximum permitted by section 109.
Image credit: Matthew Knott