Helping You To Decide Whether Chapter 7 Or Chapter 13 Is Best For You
No part of the Bankruptcy Code prohibits a debtor from exercising the right to file Chapter 13, even though they qualify to file a Chapter 7. Public policy provisions encourage, rather than discourage, Chapter 13 cases. By enacting the Bankruptcy Abuse Prevention and Consumer Prevention Act of 2005 (BAPCPA), Congress clearly indicated its intent for debtors who could repay a portion of their debts to file a Chapter 13 rather than a Chapter 7. Many of the BAPCPA amendments were designed to steer debtors to Chapter 13, rather than a Chapter 7, as the policy driving the amendments is that of repayment of debts. This congressional intent to encourage Chapter 13s and to pay creditors has been in effect since the enactment of the Bankruptcy Reform Act of 1978, which created the Bankruptcy Code.
Choosing Which Option Is Right
The choice to file a voluntary Chapter 7 or Chapter 13 is that of the qualifying debtor. The provision of the Bankruptcy Code which specifically deals with who may be a debtor in Chapter 13 is 11 U.S.C. 109. Title 11, the Bankruptcy Code, is a debtor relief statute. A myriad of reasons exist as to why a debtor may chose a Chapter 13 over a Chapter 7. Possible reasons include:
- Pride, perception and self-worth. The public perception is that a Chapter 13 is a less harsh bankruptcy, and most clients feel better about filing a Chapter 13 than a Chapter 7 due to the fact that even though they may not be able to pay everyone in full, at least they are making their best effort to pay some of their debts.
- Affordability. One has the ability to make monthly payments and obtain bankruptcy relief immediately.
- Ability to include post-petition debts. The fact that if obligations such as medical bills are incurred during the term of the Chapter 13, the client has the option of converting to Chapter 7 and include those medical bills incurred during the term of Chapter 13.
- Fewer prohibitions against possible future relief, if needed. There is the right to file a bankruptcy again and receive a discharge sooner after a Chapter 13 discharge.
- The ability to dismiss the bankruptcy. If circumstances change and you no longer desire bankruptcy relief, it is more difficult to dismiss a Chapter 7.
- Upfront fees and costs are cheaper. Many debtors desire immediate relief from creditors’ collection attempts or need to protect their property, and due to their low amount of disposable income they cannot afford to save for or to pay the upfront fees and costs required for a Chapter 7. The filing fees for a Chapter 13 are currently $310 and the filing fees for a Chapter 7 are $335. The major difference between the two chapters is that in a Chapter 13 none of the attorney fees are required upfront, as they can be paid over time through the Chapter 13 plan. Conversely, the attorney fees for a Chapter 7, which typically range between $1,450 and $1,800, must be paid upfront prior to filing. Also, the filing fees can be broken into installments making the filing of a Chapter 13 even more affordable. Additionally, both chapters require a credit counseling course, which costs about $15, to be taken before filing.
- Less harsh effect on your credit report. There is the detrimental effect of a Chapter 7 bankruptcy on credit (reported for 10 years) versus that of a Chapter 13 (reported for seven years).
- Ability to convert to a Chapter 7 bankruptcy. Many reasons exist where conversion of a Chapter 13 to a Chapter 7 are desired or necessary.
- Ability to modify the Chapter 13 plan. Due to changes in circumstances, e.g., major medical problems, loss of a job, etc., many reasons exist where plan modifications are desired or necessary.
- Not eligible to file Chapter 7. Under current bankruptcy law, a debtor must qualify under a “means test” to file for Chapter 7. If a debtor’s average monthly income for six months prior to filing bankruptcy is equal to or less than the median income in their state, they may be eligible for Chapter 7. However, if the debtor’s income exceeds the median income in their state and the debtor has a certain amount of disposable income to repay some portion of unsecured debt in a Chapter 13 repayment plan, then the debtor does not qualify for Chapter 7.
- You want to repay debt. Some debtors would prefer to fulfill repayment obligations to creditors or at least the portion they can. In Chapter 13, the debtor will make monthly payments in a three- or five-year plan to the bankruptcy trustee for the distribution to creditors. The debtor must have enough disposable income to pay all priority and secured debt in full and to pay unsecured creditors in an amount at least equal to the value of the debtor’s nonexempt property.
- You want to save your home from foreclosure. In many cases, filing for Chapter 13 will permanently stop a foreclosure. An automatic stay will temporarily prevent a foreclosure until the court confirms the debtor’s repayment plan. Once confirmed, the debtor will pay back the missing payments over the life of the plan and the terms and conditions of the original agreement will govern the debtor and the lender’s relationship. Chapter 13, however, will not prevent foreclosure if the debtor filed for bankruptcy within the last two years and the Bankruptcy Court lifted the automatic stay to allow the creditor to proceed with foreclosure. In Chapter 7, it is much less likely that a debtor will be able to keep their home if they are behind on their mortgage payments. The court will usually grant a lender’s request to lift the automatic stay in order to continue or begin a foreclosure proceeding on the home.
- You want to stop the repossession of your car. A debtor can stop the repossession of a car by filing for Chapter 13 and by repaying the debt and the arrearage in the plan. If the debtor bought the car at least two years before filing for bankruptcy, the amount owed on the loan may be eligible for reduction under the “cramdown” option. This option allows the debtor to pay the amount the car is actually worth, and interest, in equal installments over the entire term of the repayment plan. This is beneficial when the loan is upside down — the debtor owes more on the loan than the property is worth.
- You want to keep nonexempt property. A debtor can keep nonexempt property under Chapter 13. Certain assets can be protected in a Chapter 13. Under Chapter 7, a trustee will sell a debtor’s nonexempt property to pay creditors with the proceeds. Chapter 13 allows the debtor to keep nonexempt property in exchange for repayment to unsecured creditors in an amount that is at least equal to the value of the nonexempt property that the trustee would have distributed to their creditors in a Chapter 7 bankruptcy.
- You have debts that are not dischargeable under Chapter 7. Certain debts will survive a Chapter 7 bankruptcy, but are eligible for discharge in Chapter 13. Debts included in this category are:
- Debts incurred to pay nondischargeable taxes
- Court fees
- Marital debts agreed to in a settlement agreement (excludes orders of support)
- You have nondischargeable debt that you want to repay over time. Some debts, like student loans (unless discharged by the court because of undue hardship) and certain tax debts, survive Chapter 7 and Chapter 13 bankruptcy. However, in Chapter 13 the debtor may be able to pay off the debt in a repayment plan.
- You have a co-debtor. Chapter 13 will protect co-debtors from liability for a joint debt if the creditor receives payment through the repayment plan. If the debt remains after the plan ends, the creditor may collect the amount still owed from the co-debtor. Conversely, Chapter 7 will eliminate the filed personal liability for a debtor, but the co-debtor will remain responsible.
- Paying income tax debts without interest. Chapter 13 allows individuals with certain tax debts to pay the taxes over time without the necessity of paying any additional interest and penalty fees. On the other hand, those debts survive under Chapter 7 and continue to accumulate interest and penalty fees.
- Ability to repay preferential transfers and voidable transfers over time. If a debtor is found to have made a preferential transfer or an avoidable transfer, a Chapter 7 trustee may sue their friends or family members to recoup the money for distribution to creditors. However, in a Chapter 13 debtors have the ability to repay those items over time without their friends or family members being sued.
- Overreaching Chapter 7 trustees. Some Chapter 7 trustees around the country are more aggressive and administer assets that other trustee’s don’t bother to administer. A Chapter 13 can protect a debtor from unnecessarily burdensome treatment by certain Chapter 7 trustees.
If you have any additional questions about the information above or which chapter of bankruptcy is best for you and your situation, please contact our office for a free and confidential initial consultation with a skilled Louisiana bankruptcy lawyer by calling 318-550-4873 (Shreveport), 318-598-4100 (Alexandria) or 337-205-0492 (Lafayette).