Many factors are involved in determining which bankruptcy chapter is best for an individual. No two situations are identical. As a rule of thumb, bankruptcy laws require individuals to pay their debts back to the extent they can afford to do so. If you have an ability to pay something meaningful back to your creditors, then you should file a Chapter 13. If, on the other hand, you lack an ability to pay something back, you can file a Chapter 7. If you stand to lose something such as your home, your car, or personal belongings in a Chapter 7, you may wish to file a 13 instead. Unfortunately, there are many other factors to consider that should be left up to the skills of an experienced bankruptcy attorney.
The Chapter 7 is preferable in many instances because the bankruptcy discharge, or "fresh start", is finalized much sooner, generally within three and one-half months of a bankruptcy filing. In a Chapter 13, you normally do not receive your discharge until completing a three to five year repayment plan. During the pendency of the Chapter 13, it may be difficult to obtain credit due to the delay in receiving your discharge.
The attorney's fees for a Chapter 13 are much higher than a Chapter 7. However, we require much less money up front to file the case. Most, if not all, of the attorney's fees are usually paid through the Chapter 13 Plan.
Approximately, 60% of our filings are Chapter 7's which is consistent with the national average. However, some of our competitors in southern Illinois file a significantly higher number of Chapter 13's compared to Chapter 7's. We believe this raises cause for concern.
Normally, we look to file a Chapter 7 in a case unless there is a compelling reason to file a Chapter 13. We believe that if a client cannot afford the fees to file a Chapter 7, standing alone, that is not a legitimate reason to steer that client into filing a Chapter 13. Regretfully, some of our competitors feel otherwise. At the Bankruptcy Clinic, we place your financial best interest ahead of our own because we believe our professional ethics require it.
That being said, the bankruptcy laws do force us to place many of our clients into Chapter 13's. Furthermore, the Chapter 13 certainly has its advantages in many situations. There are countless other factors that may prove beneficial for a Chapter 13 filing besides a financial ability to pay back to your creditors. Below is just a sampling of some situations that would warrant serious consideration of a Chapter 13 over a Chapter 7.
- Stop the threat of repossession of your property
Creditors can still repossess your vehicle, furniture and appliances through a Chapter 7 if you are not current - they have to take the extra step of asking the Court's permission. In a Chapter 13, you can structure a repayment plan and keep your property, even if you are well behind on your payments.
- Stop a foreclosure
If you want to save your real estate from a foreclosure, Chapter 7 is not a good option because you must be current on the debt in order to keep the property. In a Chapter 13, you can keep your real estate by promising to pay the back amounts owed and interest and fees as well as the regular monthly payments on your terms. You can save the real estate from foreclosure right up to the date of sale.
- Recover repossessed property
Although you only have a very short time from the date of repossession, (twenty days in some instances) you can get your repossessed property returned to you in a Chapter 13.
- Keep real estate, vehicles or other property you might otherwise lose
A Chapter 7 bankruptcy is known as a "liquidation" type bankruptcy, meaning property that cannot be protected using the exemptions available to you may be sold and the proceeds used to pay your creditors. Chapter 13 prevents this because you are instead paying that money (the liquidation value) back to your creditors over a period of time on your own terms.
- Retain control over potential claims and lawsuits against third parties
By filing a Chapter 7, you are giving control of any potential lawsuits you may have to a Chapter 7 Trustee. The Trustee can settle your pending lawsuits for just enough money to pay your bills and no more, potentially depriving you of the fair value of your claim. In a Chapter 13, you can retain control of those lawsuits and can negotiate with the Chapter 13 Trustee to keep a percentage of your settlement.
- Save your business
If you own or run a small business and you file a Chapter 7, the Trustee can shut your business down or take over your business immediately after the filing of your case. In a Chapter 13, you can retain control of the assets and day-to-day operations of your business.
- Pay off recent back taxes, with no further interest or penalties
If the taxes are less than three years old, you still have to pay the entire amount owed within three-to-five years, but there is no interest or penalties attached to that amount.
- Pay the fair value of vehicles, furniture or appliances rather than what you owe on them
Depending on how long you have owned the property, you can pay back the value of the property instead of the full amount owed. This is helpful if you owe more on something that what it is worth.
- Lower the interest rate on secured debts
Your secured creditors are allowed only court-approved interest and no more. Unsecured debts receive no interest at all.
- Obtain peace of mind in knowing you are paying something back
Some people feel guilty about discharging their unsecured debts with creditors. It is often fulfilling to know you are paying something back to your creditors at a rate you can afford. Some individuals feel compelled to do this for moral or religious reasons.
- Improve your credit sooner
Generally speaking, a Chapter 7 is on your credit report for a period of ten years from the date of the filing of the Chapter 7. The Chapter 13, on the other hand, is only on your credit for a period of seven years from the date of filing.
- Eliminate second or third mortgages or home equity loans entirely
Depending on the value of your house and how much you owe, some of the debt you owe on your home through mortgages or home equity loans can be cut or eliminated altogether in a Chapter 13.
- Repay back child support without interest or penalties
Although you have to be current on your regular child support, in a Chapter 13 you do not have to pay interest or penalties on back child support.
- Defer student loans during the life of your Chapter 13
Although you will still have to pay the debt after the Chapter 13 is finished, and interest can still accrue, you can defer payments on your student loans during the life of the Chapter 13, giving yourself a three to five year break.
- Discharge certain debts that may be "willful" or "malicious"
A Chapter 7 bankruptcy will not allow you to discharge a debt if you caused an injury where the conduct was willful OR malicious. Chapter 13 requires a higher standard of proof, namely that your acts were willful AND malicious.
- Discharge marital settlement obligations incurred in a divorce
Under the 2005 changes in the law, debts incurred as a result of a marital settlement agreement or through a divorce (such as loans, credit cards, or medical bills) are no longer dischargeable in a Chapter 7. In a Chapter 13 case, these debts can still be discharged.
- Protect your family members
If you've paid money back to a family member within one year of your bankruptcy, or if you've given family members property recently, a Chapter 7 Trustee can force that family member to pay the money back or force the sale of that property for fair value (or the highest bidder). In Chapter 13, you pay that amount over time to your creditors and your family members remain protected.
- Protect recent purchases (such as vehicles) from Chapter 7 liquidation
If you've purchased a vehicle within three months of filing a Chapter 7 bankruptcy, and the creditor did not "perfect their lien" by submitting their title work to the state in a timely fashion, the Chapter 7 Trustee can "void" that transaction and sell the property to the highest bidder. In Chapter 13, you can keep the property and pay the creditor the amount owed at the contract rate.
- Pay less up front to file your bankruptcy
In most cases Chapter 13 bankruptcy costs are much lower "up front" than Chapter 7 - this can help you get filed faster. However, Chapter 13 fees are generally always higher than the fees in a Chapter 7. They are just paid over a longer period of time through your 13 plan payments. As stated earlier, we do not believe this alone is a legitimate reason to file a Chapter 13.
- Preserve your discharge during the pendency of a Chapter 13
Once you receive a discharge in a Chapter 7 you cannot file another one for eight years. In a Chapter 13, if you experience an unforeseen medical emergency, divorce, or incur additional bills during the pendency of your case, you can convert the case to a Chapter 7 and add in those additional bills you may have incurred along the way. This may be the best approach if you are suffering a terminal illness or severe health problems and you lack health insurance.
- Have the freedom to dismiss the bankruptcy at any time
If your situation should materially change during a Chapter 13, you have an almost absolute right to dismiss it at any time. A Chapter 7 bankruptcy is often very difficult to dismiss.
- Modify your Chapter 13 to suit your changing circumstances
Sometimes you can temporarily or permanently lower or raise your Chapter 13 payment if you've had a change in circumstances (lost job, new job, marriage, children, etc.). You have a good deal of flexibility in a Chapter 13 to match your changing situation. Many times, you can pay off your 13 early if you so desire.
- Obtain a discharge that may be time barred by a prior Chapter 7
You are eligible for a discharge in a Chapter 13 so long as two years have elapsed from the time of a prior Chapter 13 filing in which a discharge was granted, or four years from the time of a prior Chapter 7 filing. On the other hand, you can only receive a discharge in a Chapter 7 if eight years have elapsed since a Chapter 7 filing or six years have elapsed from a Chapter 13 filing.
- Protect a Co-Signer
If you have a co-signer on a consumer debt such as a car, home or credit card, a stay (or stoppage) is implemented to protect the co-debtor from collection actions during the pendency of your case. This is for the purpose of allowing you the opportunity to assume the debt during the pendency of your case. There is no co-debtor stay in a Chapter 7.
- Buy Yourself Some Time
Many times, a Chapter 13 is ideal for individuals who have suffered a temporary setback such as a job layoff, relocation, a temporary disability, or divorce. If things have gotten out of hand, but you just need to buy yourself some time until your situation improves, the Chapter 13 may be your best choice.
Free Consultation with a Skilled Lawyer
For a free consultation with the Bankruptcy Clinic, P.C., call 888-522-6578 toll free or contact us online. We have fully staffed offices in Carbondale, Marion, and Mt. Vernon, Illinois to better serve you. Evening and weekend appointments are available.
We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.
