To get personalized advice on which chapter to file under the Bankruptcy Code, you should arrange for a free initial consultation. During that telephone meeting, I will discuss your specific situation and, if I recommend that you should file bankruptcy, I will recommend which chapter.
If you are eligible to file a Chapter 7 case, then it is generally best to file under Chapter 7. Generally, the case moves quickly, most debts are discharged, and most people do not lose property.
The following are reasons why someone should file under Chapter 13 instead of Chapter 7 (assuming you are eligible to file). Although it is not for everybody, Chapter 13 can be a very effective and vital process. For some people, Chapter 13 is the only thing standing in the way of total financial disaster.
When to File Chapter 13:
Stop Foreclosures and
Repossessions
The most common use for Chapter 13
bankruptcy is stop a mortgage foreclosure or vehicle repossession.
Typically, the Chapter 13 debtor schedules to pay through his or her
reorganization plan the mortgage or vehicle loan arrearage over a 36
to 60 month period. By resuming the regular monthly payments upon
filing, and by making monthly plan payments to cover the arrearage,
the debtor will have brought the loan current by the end of the plan.
In that way, the house or vehicle is saved while the debtor gets time
to bring the loan current.
Cram Down Under-Secured Debts
It is often the case that the money owed on a residence or a
vehicle exceeds the value of the collateral, so that the loan is
under-secured. It is possible under certain circumstances to cram
down the undersecured loans by reorganizing the debt by a forced
reduction of both the secured loan balance and the interest rate to
be paid. The unsecured portion of the loan, or deficiency balance, is
treated as a general unsecured claim, which is often paid little or
nothing in a plan. For example, if the debtor owns a vehicle that is
worth $10,000 but the vehicle secures a loan for $15,000, it is
possible to provide for the payment to the secured creditor of only
$10,000 in full satisfaction of its secured claim. The other $5000
would be a general unsecured claim. That claim would typically be
discharged after distribution to the unsecured creditors of sometimes
pennies on the dollar. Please note that loans used to purchase vehicles in the 910 days prior
to bankruptcy may not be crammed down (for other personal property, the
period is one year before bankruptcy). In addition, it is possible to
convert a
high-interest loan into a less expensive deal by lowering the
interest rate to a more reasonable level. Debtors may not cram down
their first mortgage on their residence. However, where second or
third mortgages are wholly un-secured (meaning that the first
mortgage is equal to or exceeds the value of the home) it is possible
to cram down the second or third mortgage.
Avoid the Sale of Property to
Satisfy Creditors
Those debtors who normally would file a
Chapter 7 bankruptcy may find Chapter 13 more attractive if they have
non-exempt property that might be liquidated in a Chapter 7 in order
to satisfy the debts. Although the vast majority of Chapter 7 filers
do not have enough property to worry about having it sold, there are
some debtors who face loss of a substantial asset if they were to
file a Chapter 7 bankruptcy. By filing a Chapter 13 case instead, the
debtor can keep the property and simply pay the creditors the same
amount they would have received had the property been sold in a
Chapter 7 case. For example, an unmarried debtor owns a residence and
real estate worth about $200,000, with a mortgage of about $120,000
(meaning there is $80,000 worth of equity in the real estate). In a
Chapter 7 case, the debtor would be able to exempt $60,000 of the
equity in the home (using the New Mexico homestead exemption).
However, there would be $20,000 of non-exempt equity in the real
estate. To avoid the sale of the home to satisfy creditors, the
debtor could file a Chapter 13 case. In that case, the debtor would
be able to keep the residence but just schedule to pay into the plan
over a period of 5 years at least $20,000 for payment to unsecured
creditors. In that way the creditors receive the same amount that
would have been distributed to them in a Chapter 7 liquidation, while
the debtor gets to keep his home.
Failure of the Means Test (or borderline passing)
The
Bankruptcy Code has a complicated means test to determine whether a
debtor is eligible to file under Chapter 7. An ineligible debtor may
have to file a Chapter 13 case.
Prior Bankruptcy Prevents
Discharge
Sometimes
people get into trouble after they
have already received a Chapter 7 discharge. Under present law, a
person may not file an additional Chapter 7 case for a period of eight
years after the date he or she filed a Chapter 7 case in which a
discharge was entered. If the person runs into financial difficulty
before the expiration of that 8 year period, the only bankruptcy
relief practically available to the person is Chapter 13 (assuming he
or she is
eligible to file under that chapter). If at least 4 years have passed
since the Chapter 7 discharge, it is possible to file a Chapter 13 and,
after successfully completing the plan by paying to creditors his or
her disposable income for a
period of at least 36 months, the debtor may receive a discharge of
debts in Chapter 13, even though he or she would not be eligible to
file another Chapter 7 case. Even if a debtor cannot receive a Chapter
13 discharge, filing a Chapter 13 case may still be beneficial because
the debtor can provide for the orderly payment of all claims instead of
being at the mercy of the debtor's creditors.
Debts Owed for Child Support,
Alimony, or Maintenance Obligations
Domestic
support obligations ("DSO"), including debts that are, or are in the
nature of, child support, alimony, or maintenance may not be discharged
in bankruptcy. In addition, no property is exempt from recovery by a
DSO creditor in a Chapter 7 case. However, those debts may be fully
satisfied under a Chapter 13 plan. As long as the debt is scheduled to
be fully paid, the debtor can obtain the benefits of bankruptcy
protection while paying off the non-dischargeable DSO debts.
Priority Debts for Taxes
A debtor with priority tax claims (generally those federal or
state tax obligations that were assessed in the 3 years prior to
bankruptcy)are not dischargeable in bankruptcy, but can be paid off
in a Chapter 13 plan.
Keep Control of Consumer Claims
Debtors who have claims or causes of action against creditors will
lose control of those claims in Chapter 7. However, in a Chapter 13
case, the debtor remains in control and may pursue the claims. The
debtor has standing to file Adversary Proceedings on all pre-petition
claims, to object to improper proof of claims, to pursue all claims
arising during the case such as automatic stay violations, and to have
a venue for filing all dischargeability proceedings. Almost all of the
adversary proceedings provide for fee-shifting statues that require the
creditor to pay the debtor's legal fees.
Pay off Your Vehicle Loan and Keep the Car
In Chapter 7 cases, the debtors must
either redeem (pay off the loan up to the value of the vehicle) or
reaffirm the debt (meaning that the debt is not discharged and remains
owing). The debtor may want to file a Chapter 13 case and pay off the
vehicle loan in the plan. Under some circumstances the loan balance and
interest rate may be effectively reduced in a Chapter 13 case.
Debts Incurred to Pay Taxes
Debts incurred to pay taxes are not dischargeable in a Chapter 7 case. They are dischargeable in a Chapter 13.
Debts Arising from Willful and Malicious Injury to Property
Debts arising out of willful misconduct, or malicious injury, to
property may not be discharged in a Chapter 7 case. They are
dischargeable in a Chapter 13.
Debts Arising from Willful and Malicious Injury to Persons
Debts from willful misconduct or malicious injury, resulting in
personal injury are not dischargeable in a Chapter 7. They are
dischargeable in a Chapter 13 if the debtor files the Chapter 13 before
a State court action has gone to judgment. In other words, file before
the case gets decided.
Marital Property Settlement Debts
Although debts arising out of marital property settlements are not
dischargeable in Chapter 7, but these debts remain dischargeable in
a Chapter 13 case.
Reclaim Personal Property that was Repossessed Before Bankruptcy
If your vehicle was repossessed by the secured creditor and the
vehicle has not yet been sold by the creditor at the time of filing the
Chapter 13, the creditor will have to return the vehicle to the debtor
if the debtor pays the storage and repossession fees and if the plan
calls for adequate protection and payment of the secured claim.
Pay Off Non-Dischargeable Debts in an Orderly Manner
For a debtor with non-dischargeable debt (such as debts arising out
of fraud, embezzlement, or larceny, criminal restitution, fines, or
penalties, among others), Chapter 13 allows the debtor to manage and
orderly pay off the debt. After the Chapter 13 plan pays off the
minimum required to general unsecured creditors, the remainder of the
plan term (up to 60 months) can be used to to pay down the
non-dischargeable debt. While the plan is in effect, the creditor will
not be able to collect on the debt by garnishment of wages or
attachment of property.
