Why a Chapter 13 Bankruptcy may be better than a Chapter 7 Bankruptcy
By John Lee
Most of the times when I meet with a potential client for a free consultation they tell me that they want to file a Chapter 7 Bankruptcy. Typically, they have some vague concept that in a Chapter 7 Bankruptcy all of their debts are wiped out and in Chapter 13 Bankruptcy they have to pay back their debt. In most cases, they tell me that they just want to wipe out their debt and not have to deal with paying any back. While I completely understand why they would want to do this, sometimes it is not the best option. There are many reasons a person may want to file a Chapter 13 Bankruptcy.
If a person has received a discharge in a Chapter 7 Bankruptcy in the last eight years, then they are not eligible to file for one now. Often times a person will come to me with a wage garnishment that is putting a choke hold on their cash flow causing them to not be able to pay basic bills like rent. However, they can’t file a Chapter 7 Bankruptcy because they already received a chapter 7 discharge. In cases like this, I will advise them to file the Chapter 13 Bankruptcy to stop the garnishment and receive the protection of the automatic stay. If a person files a Chapter 13 Bankruptcy because they were not eligible to file a Chapter 7 Bankruptcy, then they cannot convert that Chapter 13 into a Chapter 7 later. However, they could have the Chapter 13 dismissed at some point in time and then file a new Chapter 7 Bankruptcy. Of course by filing a Chapter 7 Bankruptcy later, when you are eligible, it causes another bankruptcy to go on your credit report. Normally, it is best to just stay in the Chapter 13 once it is filed unless you truly can’t make the monthly payments.
Chapter 7 Bankruptcy does not discharge most tax debt. While a Chapter 13 Bankruptcy does not discharge all of the tax debt, it does allow the debtor to go onto an interest and penalty free repayment plan with the government. A debtor can save thousands of dollars in interest and penalties by filing a Chapter 13 Bankruptcy.
One of the main reasons for filing a chapter 13 bankruptcy is to stop a foreclosure. A Chapter 7 Bankruptcy may temporarily stall a foreclosure for a couple of months. A Chapter 13 Bankruptcy can stop a foreclosure sale and allow the debtor up to five years to pay back the mortgage arrearages.
A Chapter 7 Bankruptcy will not permanently stop a lender from repossessing your automobile. Even though you can discharge the debt associated with your car, the lender cans still come and repossess the car after the Chapter 7 Bankruptcy. A Chapter 13 Bankruptcy can stop the repossession and put the debtor on a payment plan to pay for the car. In many cases, the debtor will have a lower interest rate and monthly payment in the Chapter 13 Bankruptcy than they did prior to filing the bankruptcy. In some cases, the debtor can even have the principle balance on the car reduced to the actual value of the car. In most cases, the debtor saves money and keeps their car in a Chapter 13 Bankruptcy.
In a Chapter 7 Bankruptcy, if the debtor recently made a lot of charges on his credit card immediately prior to filing the bankruptcy the creditor may object to the discharge. Large purchases, cash advances and the purchase of luxury items may be non-dischargeable in a Chapter 7 Bankruptcy. However, in a Chapter 13 Bankruptcy these purchases tend to receive fewer objections from the creditors.
A lot of Pro Se debtors lose their house in a Chapter 7 Bankruptcy. Here in Virginia we have a once in a life time Homestead Exemption of only five thousand dollars. So if you have over $5,000.00 equity in your house when you file a Chapter 7 Bankruptcy you could lose your home to the Chapter 7 Bankruptcy Trustee. The debtor does not lose his home because of equity in a Chapter 13 Bankruptcy. I advise clients to file Chapter 13 Bankruptcy to keep their home if it has any equity in it.
A lot of Pro Se debtors lose their bank accounts, tax refunds and other items in Chapter 7 Bankruptcy because they had previously used up their once-in-a-lifetime Homestead Exemption. If you have previously filed a bankruptcy in Virginia there is a good chance you have already used up your once-in-a-lifetime Homestead Exemption. If this is the case, then you may need to file a Chapter 13 Bankruptcy in order to keep your cash and future tax refunds.
Since the Bankruptcy Reform Act of 2005, there has been a Means Test applied to debtors attempting to file a Chapter 7 Bankruptcy. Basically, with a few exceptions, if your household has more income than the state median for your household size, you may not qualify for a Chapter 7 Bankruptcy. When this happens, you can still file a Chapter 13 Bankruptcy and discharge most of your debts. It is true that you will have to pay some of your debts back over a five year repayment plan, but it is still typically much less than you would have to pay back had you not filed bankruptcy.
If you have ongoing debt, like medical bills that you expect to keep coming in, you may want to file a Chapter 13 Bankruptcy. The Chapter 7 Bankruptcy can only be filed once every eight years. If you know that next year you are going to have a lot of debt you cannot afford, you may not want to use up your Chapter 7 Bankruptcy now. I would advise to wait until all the medical bills come in before filing any bankruptcy at all, but if you must file bankruptcy now, then you are better off filing the Chapter 13 Bankruptcy because you may have the option of converting it to a Chapter 7 Bankruptcy when all the rest of the medical bills come in.
Some people file Chapter 13 Bankruptcy when they are not eligible for a Chapter 7 Bankruptcy AND they are not eligible for a Chapter 13 discharge. They file bankruptcy knowing that they will never have their debts discharged. Typically, the person that files a bankruptcy knowing there is no discharge has already filed their Chapter 7 Bankruptcy and is not eligible for a Chapter 13 discharge, but they still want the automatic stay and payment plan. Typically the debtor who does this is using the automatic stay to protect himself and going on a payment plan with secured creditors or tax debt that he would have to pay back anyway in order to keep the collateral (house, car, etc.)
If you choose to file a Chapter 13 Bankruptcy there is no benefit to attempting to do it without the benefit of counsel. Not only are Chapter 13 bankruptcies complicated and almost impossible to finish without the assistance of an attorney, there is no financial reason for doing it on your own. The Chapter 13 Bankruptcy is a three to five year court approved repayment plan to your creditors. The attorney fees are paid through your court approved Chapter 13 plan. Most bankruptcy lawyers will file your Chapter 13 Bankruptcy for as little as $500.00 and accept the court approved repayment plan for the remainder of their fees.
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