By: Lance T. Denha, Esq.
Many clients struggle to negotiate their debts and attempt their very own “fresh start.” This “fresh start” can range from discussions with credit counselors to actual negotiations with credit card companies, lenders and other creditors. If these non-bankruptcy alternatives fail, most consumer debtors will have to choose between a liquidation proceeding under Chapter 7 of the Bankruptcy Code and a debt adjustment proceeding under Chapter 13 of the Bankruptcy Code. However, some bankruptcy candidates do not have a choice between either. If debtors must file for bankruptcy protection, they may be forced to use Chapter 13 and repay some of their outstanding debt. Likewise, if debtors do not have a steady income, their only bankruptcy choice is Chapter 7. Many people who have a choice decide to file under Chapter 7 bankruptcy protection, however there are some situations when Chapter 13 may be considered a better option which are discussed below.
REASONS TO CHOOSE CHAPTER 13
Although Chapter 7 is easier and does not require repayment, there are many good reasons why people who qualify for both types of bankruptcy choose Chapter 13 instead. Generally, Chapter 13 bankruptcy might make sense if debtors will have adequate, steady income to fund a plan for the appropriate period of time, and are in any of the following situations:
· Debtors are facing foreclosure on their home or their car is being repossessed. Using Chapter 13 bankruptcy protection permits debtors to make up the missed payments over time and reinstate the original agreement. Debtors generally cannot do this in a Chapter 7 bankruptcy. Instead they ultimately lose the property if they are behind on payments in a Chapter 7 bankruptcy.
· Debtors have more than one mortgage and are facing foreclosure because they cannot make all the payments. If debtor’s home value is less than or equal to what they owe on their first mortgage, debtors can use Chapter 13 to change the additional mortgages into unsecured debts, which do not have to be repaid in full, and lower the amount of their monthly payment.
· Debtors may also take advantage of Chapter 13 cramdown options for cars purchased more than 2-½ years ago before filing for bankruptcy in order to keep the car by repaying its replacement value in equal payments over the life of the plan, rather than the full amount debtors owe on the contract.
· Co-debtors would be protected under the Chapter 13 plan but would not be protected if debtors used Chapter 7.
· Debtors also may owe debts that can be discharged in a Chapter 13 bankruptcy but not in a Chapter 7 bankruptcy. For instance, debts incurred to pay taxes (generally) cannot be discharged in Chapter 7 but can be discharged in Chapter 13.
REASONS TO CHOOSE CHAPTER 7
Most people who have a choice traditionally have opted to file for Chapter 7 bankruptcy because it is relatively fast, effective, easy to file, and does not require payments over time. It also does not require you to be current in your income tax filings, unlike in a Chapter 13. In the typical situation, a case is opened and closed within three to four months, and the filer emerges debt free except for a mortgage, car payment, and certain types of debts that survive bankruptcy (such as student loans, recent taxes, and back child support).
If you have any secured debts, such as a mortgage or car note, Chapter 7 allows you to keep the collateral as long as you are current on your payments. However, if debtor’s equity in the collateral substantially exceeds the exemption available to you for that type of property, the trustee can sell, pay off the loan, pay debtors the exemption amount they are entitled under the bankruptcy laws, and pay the rest to their unsecured creditor. If debtors are behind on the payments, the creditor can come into the bankruptcy court and ask the judge for permission to repossess the car (or other personal property) or foreclose the debtor’s mortgage. As a general rule, however, most Chapter 7 filers are able to keep all their property because any equity they own is protected by an exemption.
Therefore, before debtors decide to file for bankruptcy, whether it be a Chapter 13 or Chapter 7 bankruptcy, debtors need to make certain bankruptcy is the right solution for their problem and then begin to assess which type of bankruptcy best fits their needs.