Which Is the Best Chapter in Bankruptcy in Which to File for Relief?

Which Is the Best Chapter in Bankruptcy in Which to File for Relief?

Prospective clients interested in what a bankruptcy has to offer in the way of relief often want to know whether it is better to file under Chapter 7 or Chapter 13. My stock response is:  I do not know, after 5-10 years, with 20-20 hindsight we would know whether a 7, a 13, or not filing at all would have been the “best” course of action.

But that does not help someone under financial stress now, so here are some pro’s and cons of Chapter 7 and Chapter 13 filings:

1. Payment of Money to the Trustee: a Chapter 7 filing means that there are no mandatory payments to the Trustee with which to pay creditors.  There can be payments in the situation where there are assets that the debtor would lose and wishes to keep, but that is a voluntary decision to be made; in a genuine no-asset case there is no payment. A Chapter 13 filing means mandatory payments to the Trustee, and the Trustee’s fee for handling the payments to creditors is 10%.
2. Time: a Chapter 7 the process is quicker, typically 4 months from the time of the filing to the conclusion and a debtor can start rebuilding their credit much sooner. In a Chapter 13, the minimum amount of time to be making payment to the Trustee is 36 months (unless unsecured creditors will be paid 100% in less time) and depending upon income, expenses and assets owned by the debtor the case may stay open for 60 months.
3. Keeping Assets: If there are assets that would be taken by the Trustee in a Chapter 7 that the debtor wishes to keep, a Chapter 13 filing allows the debtor to do so, but see #1 above, payments will have to be made to the Trustee; examples:  cars that are paid off; vacation homes, jewelry, family heirlooms, and so forth.
4. Ability to Have a “Normal” Life: A debtor in a Chapter 13 can not sell assets or undertake new debt without first having bankruptcy court approval, which means the debtor’s life is not really his/her own until the Chapter 13 case is over; example: car dies and another vehicle is needed, consent from the Trustee is needed to buy another car with financing, and if the Trustee does not consent then a Motion to the Court must be made.
5. Type of Debt: Some debts that are not dischargeable in a Chapter 7 are dischargeable in a Chapter 13; once the payments to the Chapter 13 are completed the obligation of the debtor to make payment will be discharged; Example:  support obligations arising from a divorce decree can not be discharged under either chapter, but if a spouse is supposed to make payment to the other spouse as part of equitable distribution of assets, that payment is not for support and CAN be discharged in a Chapter 13.
6. Legal Fees: Fees are generally much lower for a typical Chapter 7 than for a typical Chapter 13.
7. Adjustments to Mortgage/Home Equity Liens/HOA-COA liens: A first mortgage on a debtor’s primary residence will not be affected in either Chapter 7 or Chapter 13.  A first lien on another parcel of land, such as a vacation home or a rental property, can’t be adjusted in a Chapter 7 but it can in a Chapter 13.  Under current law, a second lien on any type of property where the property is worth less than what is owed on the first lien can be dissolved in only a Chapter 13 case.  However, if the property is worth more than what is owed on the first lien but less than what is owed for both liens, the 2nd lien can be reduced in a Chapter 13, but not in a Chapter 7.
8. Adjustments to Liens on Motor Vehicles: Not possible in a Chapter 7 but possible in a Chapter 13. The bankruptcy judge has the right to set the secured portion of the debt at the current fair market value of the vehicle.  The rest of the money owed under the purchase is treated as an unsecured debt, such as credit cards, hospital bills, personal loans.  The judge also has the authority to adjust the interest rate to be applied. The starting point is the prime rate, plus 2%.
9. Adjustments to Liens on Personal Property Other Than Motor Vehicles: Think in terms of items purchased using the vendor-store’s own credit card or finance agreement, such as furniture stores, electronic, TVs, computers, lawn mowers, and other items.  The difference is that the debt must have been incurred more than 365 days before the bankruptcy filing, as opposed to 910 days for motor vehicles.  The interest rate application is the same as #8 above.
10. Getting Relief from Immediate Payments: Some debts can not be discharged in either a Chapter 7 or a Chapter 13, such as certain taxes or some student loans.  A Chapter 13 can offer some protection in terms of how much money will have to be paid, since the amount of the payment to be made by the debtor to the Chapter 13 Trustee for taxes or student loans is controlled by the Bankruptcy Code.  An example:  a student loan must be paid but the amount to be paid each month causes financial distress, the student expects to be earning much more money in a few years but right now can not handle what is required–by filing for Chapter 13 the debtor can put a lid on the current payments and then pay the increased amount when their income has increased with more experience in their employment.

Please feel free to contact Mr. Lampert to discuss how he may be able to assist you in such matters.