Independence from Debt

This 4th of July make your move towards financial freedom.  Get informed. You’ll feel tons better once you know your options.

 

Is This Your Life Today?

If you’re reading this most likely you’ve got some rather serious financial problems. Most likely your debts are overwhelming you, worrying you all the time.

You’ve probably been trying to improve your situation for a long time, likely for years. It’s really affected your life. It hasn’t helped your personal relationships. The anxiety is impacting your health.  It’s hard to feel good about yourself, to be happy or relaxed.

It’s difficult to take care of your basic daily needs, and of those who depend on you. It’s frustrating to think about the long-term responsibilities that you aren’t getting ahead on, like saving for retirement.

What You Need

Financial peace. Financial freedom.

You’d like to be able to afford what’s important to you. You’d like to not be worrying all the time. You’d like to have reasons to be hopeful; you’d like to have a future worth looking forward to.

Take the First Step

You’ve heard the expression that the first step is always the hardest. There’s something about human nature, especially when we’re feeling down, that makes us assume that resolving a problem will be harder than it actually ends up being. We are often pleasantly surprised that once we take the first step the process is not as hard as we had feared. Then afterwards we wish we would have had the nerve to take that first step much earlier and avoid unnecessary grief in the meantime.

So take that first simple but crucial step: find out your legal options about your debts.

From Fear to Practical Options

You find out your options by seeing a lawyer who focuses on helping people like you solve their consumer and/or business debt problems.

This may be easier than you think because asking for this kind of help is usually free, at least to get started. Most lawyers who help people deal with their debts don’t charge for their initial meeting with you.

At this meeting you will have the opportunity to tell the lawyer about your situation, your concerns, and your goals. The lawyer will usually outline your most likely legal options, along with their major advantages and disadvantages.

But Do You Really Get Something for Nothing at that Initial Consultation?

Most lawyers who help consumers and small businesses with debt problems don’t charge for their initial meeting for various reasons.

And sure, it’s partly a marketing tactic. Lawyers hope that once you take the trouble to meet with them you will like them and will more likely hire them if they decide to retain a lawyer.

There’s also the reality that when you are in financial trouble you likely can’t spare the money on shopping for a lawyer. So fortunately most lawyers don’t charge for that chance for you to check them out and get advice from them.

It’s worth mentioning that most of these lawyers actually do care about you and genuinely want to help you. That’s because who get into the field of helping people deal with their debts they get satisfaction from improving their clients’ lives.

So take advantage of their free offer.

Be Picky and Find a Good Match

Just because you have an initial consultation with a lawyer, you have absolutely no obligation to continue working with that lawyer. You are seeking information and advice, and maybe looking for an attorney to help you. After the initial meeting ask yourself the following questions.

Did the lawyer listen carefully to you to get enough information about you and your finances? Did he or she present your options clearly, and answer your questions about them in an understandable way? Do any of the options presented meet your goals?

Was the lawyer considerate, treating you like a human being? Were your concerns heard and addressed directly? Was the lawyer knowledgeable but not overbearingly so? Were you comfortable with him or her? Did you feel he or she was worthy of your trust? Were you and the lawyer a good fit?

But Won’t Lawyers Always Recommend Filing a Bankruptcy Case?

No. That would be contrary to their ethical and legal obligation to you.

Lawyers are strictly required to represent YOU, not to pressure you into any preconceived direction. They must advise you of your options, and the advantages and disadvantages to you, without any regard for their financial self-interest. They can be sued for malpractice for giving bad advice, or could lose their law license. That applies even to free initial consultation meetings.

Furthermore, a lawyer’s job is to lay out the options so that YOU can make an informed decision. The attorney doesn’t tell you what to do; that’s your choice. Yes, his or her job is to advise you, and usually to make recommendations, strongly or otherwise. But not to make decisions for you or to make you do anything. If the lawyer you meet seems to be putting any uncomfortable pressure on you, find another one who respects your appropriate role as the decision-maker.

Take that First Step

Call to set up a consultation meeting with a lawyer who focuses on debt matters. Meet with him or her. You will almost certainly come away from that initial meeting much, much better informed about your options. You will very likely feel much better about being able to find the freedom from debts that you need.

 

Chapter 7 Bankruptcy Can . . . Remove a Judgment Lien

Besides legally writing off all or most of your debts, “straight bankruptcy” can often remove judgment liens from the title of your home.

 

Chapter 7 bankruptcy usually has two main goals, and usually accomplishes them. #1: Filing the bankruptcy case immediately stops your creditors from collecting against you and your assets. #2: It legally wipes out forever, or “discharges,” all or most of your debts.

In many Chapter 7 cases those are the benefits it provides. Often those are just the benefits that you need.

But Chapter 7 provides other benefits. Especially if you can’t decide whether or not you should file bankruptcy, these other benefits may help your decision.

“Avoidance” of Judgment Liens on Your Home

The following conditions must be met to remove a judgment lien from your home’s title:

  • The judgment lien must be on your home, your legal “homestead.”
  • You must qualify for and claim a homestead exemption on that home. That usually means that you are living there now, or even if you are not living there at the moment, it is the home you intend to return to.
  • The lien you are trying to remove must be a “judicial lien.” That means a lien that the creditor created through a court judgment. A “judicial lien” is defined in the Bankruptcy Code as “a lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.”
  • The debt that the judgment lien is based on CAN’T be for child or spousal support, or for a mortgage foreclosure.
  • The judgment lien must “impair” the homestead exemption. Essentially that means that to the extent that there is any equity in the home, the judgment lien eats into the equity that is protected by the homestead exemption on the home.

So for example, if:

  • You own a home worth $230,000 with a mortgage of $200,000, and so you have equity of $30,000 in the home.
  • Assume for our example here that the amount of homestead exemption available to you in your state is $35,000.
  • A creditor sues and gets a judgment against you for $20,000, which turns into a judgment lien against your home in that amount.
  • The entire amount of that $20,000 judgment lien eats into the $30,000 home equity that is protected by the homestead exemption. The judgment lien “impairs” the homestead exemption. So the judgment lien would be “avoided,” or released through the power of the Chapter 7 bankruptcy case.

Takes an Extra Procedure

Filing the Chapter 7 bankruptcy and through the 3-4-month process would very likely discharge the debt that caused the judgment and its lien. But getting the release of the judgment lien itself takes an extra step. That extra step—usually a motion filed by your attorney in the bankruptcy court—must be done or else the judgment lien will continue to exist against your home.

This is important because otherwise you could find out that the judgment lien continues to be on your home title months or years later when you’re trying to refinance or sell your home. 

Also, the motion to avoid the judgment lien should be filed while your Chapter 7 case is still open and active, again within about 3-4 months after you file your case. If your Chapter 7 case is completed and closed before you or your attorney files the motion, the procedure to avoid the judgment lien would likely cost you hundreds of dollars more in extra filing fees and attorney fees.

Conclusion

So if you own a home, find out if you have a judgment lien against its title. If you do, talk to a bankruptcy lawyer about whether that lien could be “avoided” in a Chapter 7 bankruptcy case. If so, gaining this very important extra benefit for your home could make filing bankruptcy much more beneficial for you.

 

“Converting” from Chapter 13 into Chapter 7

When you are deciding whether to go into a Chapter 13 payment plan, it’s good to know you have Chapter 7 as a backup.

 

Chapter 13—Powerful But Uncertain

Chapter 13 is an amazing tool. It can often do much more than Chapter 7 with certain kinds of debts. It can save your home or vehicle, sometimes by reducing how much you need to pay monthly and overall. It can often deal much better with income tax debts, child and spousal support arrearage, and various other special debts.

But Chapter 13 also requires a long-term commitment. The payment plan that you and your attorney propose requires looking into the future. Usually it requires assuming that your income and expenses will stay reasonably steady for at least the next 3 to 5 years. Or it requires predicting your income and expenses that far into the future. Of course life does not always go as planned.

Risk-Inducing

The power of Chapter 13 may encourage people to make decisions which may make sense but involve more risk.

To qualify for Chapter 13 you must be an “individual with regular income,” meaning that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan.” (See Sections 109(e) and 101(30) of the Bankruptcy Code.) That requirement of a “stable and regular” income is a vague one. It requires you to make a prediction that your income will be “regular and stable” enough into the future.

Bankruptcy courts tend to at least give debtors a chance to demonstrate that their income (and expenses) are stable enough for Chapter 13. If your payment plan is sensible you are usually given the opportunity to see if you can make the payments you are proposing.

So you may appropriately decide to file a Chapter 13 case to be able to do what you otherwise couldn’t do—such as to hang onto your home or vehicle, or gain some other benefit only available under Chapter 13. But then your income may later get reduced, an expected income increase may not happen, or your expenses may unexpectedly increase. So you may need to admit that you could not pay as much as you had expected.

Knowing that Chapter 7 is always available as a fallback option can be very helpful in making a good decision to file a Chapter 13 case.

Chapter 13’s Power and Uncertainty Illustrated

Here’s an example to illustrate how this can work well.

Assume you were $15,000 behind in payments on your home’s first mortgage. The home is worth a little less than the amount owed on that mortgage. And you also have a second mortgage on top of that.

If you filed a Chapter 7 “straight bankruptcy” case in this situation, you’d likely just surrender the home and get out from under those debts. But then you’d no longer have your home.

Chapter 13 gives you the power to “strip” the second mortgage off the title of that home (again, assuming that all of the equity is covered by the first mortgage alone). “Stripping” the second mortgage means you wouldn’t have to pay its monthly payment, thereby significantly lowering your monthly cost to keep the home.

This “stripping” also lowers the debt against the home by the amount of that second mortgage, bringing the home’s total debt down closer to the its market value. Keeping the home is now cheaper and more financially sensible.

However, doing this may still be tough for you financially, no matter how much it saves you. Whether you can pull it off would still depend on all the amount and reliability of your income and expenses. You may understandably be inclined to stretch your budget to try to save your home. That may especially be true if you have strong intangible reasons to do so, such as to keep your kids in the same schools and neighborhood, or because rents are so high in your area. 

Knowing that Chapter 7 is a fallback option if for whatever reason you can’t fulfill the terms of your Chapter 13 plan can help you take appropriate risks when filing Chapter 13.

The Right to Convert to Chapter 7

The Bankruptcy Code explicitly states in Section 1307(a) that a Chapter 13

debtor may convert a case under this chapter to a case under chapter 7 of this title at any time. Any waiver of the right to convert under this subsection is unenforceable.

Notwithstanding this very clear right to convert, there can be situations in which the court believes that the bankruptcy laws are being abused and conversion is not allowed. But these situations are rare. Talk with an experienced bankruptcy lawyer about how the local bankruptcy judges are dealing with conversions from Chapter 13 to 7. But in general you can assume that you can switch to a Chapter 7 case, like the statute states, “at any time.”

Applying Our Hypothetical

Let’s look again at the above hypothetical example. Let’s also assume that you have a son or daughter in high school deeply involved in his or her school’s sports or other activities. If you surrender their home and could not afford a rental within this high school’s boundaries, your child may have to change schools, something you very much want to avoid.

You may be really concerned about the stability of your future income. You know that there is some risk in whether you’d be able to pay what need to pay to stay in your home. But you may appropriately believe the risk is worth the opportunity for your son or daughter to complete the year or two of school.

The Crucial Conversion Option

Our last blog post listed some of the potential disadvantages of simply dismissing a Chapter 13 case. Mostly, you immediately lose protection from creditors and your debts are not discharged (legally written off).

Conversion to Chapter 7 avoids those disadvantages. The protection from creditors—the “automatic stay”—continues from the prior Chapter 13 case without a break into the new Chapter 7 case. And at the end of the Chapter 7 case, usually about three months after the conversion, all or most of your debts are discharged.

So, conversion to Chapter 7 can be a decent back-up plan when the goals of your Chapter 13 case can no longer be met. As you’re considering whether Chapter 13 is the right option for you, it’s good to know that if you have a change in circumstances, and/or if you take a calculated risk which does not go your way, you can convert into a Chapter 7 case.

 

Changing Your Chapter 7 Case into a Chapter 13 One

If necessary you can usually change your Chapter 7 “straight bankruptcy” case into a Chapter 13 “adjustment of debts” one.

 

Most Chapter 7 cases take only about 3 or 4 months. Because they are finished so quickly, that doesn’t leave much time for the circumstances that got you to file the case to change. So usually you don’t have any reason to wish you could change your mind.

But sometimes things do change.

Changed Circumstances

A short time after filing your Chapter 7 case you could change your job with your income going up unexpectedly. This may disqualified you from Chapter 7 if your increased income means you could no longer pass the “means test.” Or that increased income may enable you to hang onto a home or a vehicle through a Chapter 13 case that earlier you didn’t have enough income to do.

Or, right after filing a Chapter 7 case you could have a vehicle accident resulting in some large new medical bills. You can’t write off debts in your bankruptcy case that you incurred after filing your case. So you might feel like you should get out of your Chapter 7 case and file a new one to be able to include the new medical debts.

In both these situations you now want to get out of the Chapter 7 case. Can you do so by switching from a Chapter 7 case into a Chapter 13 one? Or instead can you close down a Chapter 7 case so that you could start a new one? We address the first question today, and the second one in a week.

Conversion of a Chapter 7 Case

The process of changing your case from a Chapter 7 case into a Chapter 13 one is called “conversion.”

The Bankruptcy Code says that the “debtor may convert a case under this chapter [7] to a case under chapter… 13… at any time, if the case has not been [already] converted… .” (See Section 706(a).)

Qualifying for Conversion

To be able to convert, you have to qualify for Chapter 13. Among other requirements this means:

1) you must be an “individual with regular income,” meaning that your “income is sufficiently stable and regular to enable [you] to make payments under a [Chapter 13] plan” (Sections 109(e) and 101(30)); and

2) you can’t have more debt than the following miximums—$394,725 in unsecured debts and $1,184,200 in secured debts (as of when these amounts were last revised on 4/01/16) (Section 109(e)).  

When to Convert to Chapter 13

If you expected to be in a relatively straightforward 3-month procedure, then shifting into one involving a court-approved payment plan likely lasting three to five years probably doesn’t sound so good.

But if you are converting the case to preserve a crucial asset, you may be very happy that there’s a tool for doing that.

Same thing if you find out that you have a special debt that would not be handled well under Chapter 7 but would be in a Chapter 13 case.

You might even find that Chapter 13 would have actually have been a good alternative at the outset. And if not, it can still be a very sensible second choice.

 

Bankruptcy Made Simple

Bankruptcy gives you options for taking charge of your financial life. 

 

What is Bankruptcy?

Bankruptcy is a legal option for dealing with your debts.

It enables you to face your financial life in an honest and realistic way. It allows you to put past problems and mistakes behind you, focus your energies on the present, and set goals for the future.

Bankruptcy is a personal choice that may be right for you or may not. But if you are financially struggling, it’s wise to find out about it.

Bankruptcy Options

For most consumers there are two main, quite different bankruptcy options—Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts of an individual.”

There’s also the far less common Chapter 11 “reorganization” and Chapter 12 “adjustment of debts of a family farmer or fisherman.”

For a sense of how much each of these Chapters is used, out of close to 845,000 total bankruptcies filed in the United States in 2015, about 535,000 were Chapter 7 cases, about 302,000 were Chapter 13’s, only about 7,250 were Chapter 11s and about 400 were Chapter 12s.

So about 99% of bankruptcies that were filed—consumer AND business—were Chapter 7s or 13s.

The Bankruptcy Chapters

These options are named after the chapters of the federal bankruptcy statute in which they are found, Title 11 of the United States Code.

Chapter 7 is by far the most common. The procedure usually takes less than 4 months, usually resulting in the discharge (legal write-off) of all or most debts that you want to discharge. Also, you can usually get to keep all your assets that you want to keep.

Chapter 13 is a 3-to-5-year payment plan, almost always paying only a portion of your debts, often only a small portion. With certain debts it can provide big advantages that are unavailable under Chapter 7. Can be especially good for dealing with your secured debts—home mortgages and vehicle loans particularly—and special debts that can’t be discharged such recent income taxes and child support arrearage.

Chapter 11 is usually used to continue operating a business. But it is also sometimes used by consumers, particularly if they have extraordinarily high amounts of debt (beyond the maximums allowed under Chapter 13). Is a much more complicated procedure than Chapter 13, and much, much more expensive.

Chapter 12 is for ranchers, farmers, and fishermen. It blends aspects of Chapter 11 and 13.

Choosing between Chapter 7 and 13

Practically speaking, for consumers the choice is usually between Chapter 7 and 13.

In very general terms, Chapter 7 tends to be the better way to go if your situation is relatively straightforward, especially as to your debts.

If your situation is more complicated, again especially if you have certain kinds of debts, Chapter 13 tends to be better. By certain kinds of debts we mean, for example:

  • home mortgage(s) or vehicle loans that you’re behind on
  • a second or third mortgage
  • judgment and tax liens on your home
  • a vehicle loan with a balance larger than the vehicle’s value
  • unpaid income taxes
  • child or spousal support arrears
  • non-support debt owed to ex-spouse
  • student loans

Often whether Chapter 7 or Chapter 13 is best for you will be quite clear. But before seeing a lawyer you should keep an open mind because candidly you are most likely not aware of all the available advantages and disadvantages. An experienced bankruptcy lawyer will help you understand and decide among your choices.

Bankruptcy Gives You Options

So bankruptcy is all about options and choices. There’s the choice between Chapter 7 or 13, or sometimes some other Chapter or other creative game plan. Then within each Chapter there are usually choices about how to deal with various debts. With all these choices bankruptcy can empower you to take charge of your financial life.

 

Spouse Reluctant to Join Bankruptcy to Discharge Debts

Deciding whether your spouse should join in your bankruptcy case requires a full understanding of your unique situation.

 

My last blog post explained that filing a bankruptcy by yourself immediately protects YOU from creditor collection activity but does not protect your spouse if he or she does not join in your Chapter 7 bankruptcy case. Similarly, any legal write-off (“discharge”) of debts applies only to the person(s) filing the bankruptcy. So any discharge of debts does not apply to your spouse if he or she does not either join you in your bankruptcy case or else files his or her own case.

That makes perfect sense—of course you don’t get the benefit of bankruptcy if you do not join in filing bankruptcy. But there are reasons why one spouse would not want to do so.

One Spouse Has Most of the Debts

Sometime one spouse is the only one individually liable on most of the debts. Or one may be separate liable on all or most of the debts except for being jointly liable only on the secured debts—their mortgage and/or vehicle loans. If the couple intends to keep paying on those, there is little motivation or need for the spouse who is only liable on the secured debts to join in the bankruptcy.

These situations can happen when one spouse incurred all the debt from operating a business that failed. Sometimes one spouse was simply the primary income source and/or the one with good enough credit to run accumulate debt. Maybe the most common situations are relatively new marriages into which one person has brought a lot of debts.

In these situations only the spouse whose debts would be discharged would directly benefit from a bankruptcy filing, so the other would sensibly be reluctant to be in a bankruptcy that appears to provide him or her no benefit. Indeed it could well be mutually beneficial if the one spouse not filing can hold on to a better credit record and help the other spouse rebuild his or hers.

The Other Spouse Has a Major Separate Asset

If the reluctant spouse separately owns something he or she absolutely does not want to lose, his or her reluctance to be involved understandably increases. The spouse may not even be willing to expose it to the bankruptcy process, even after getting strong assurances from a bankruptcy lawyer that the asset is protected by a property “exemption.” The more the asset is deeply personal—such as a family heirloom—or crucial to the person’s livelihood—such as tools of trade or a vehicle—the more extreme may be the reluctance.  

There’s Almost Always a Decent Solution

Most of the time there is a way to meet the needs of both spouses.

There may genuinely be no dire need for the reluctant spouse to join the bankruptcy case. Even if there is a debt or two that he or she is legally liable on—either separately or jointly—paying those off may be worthwhile. That would depend on the debt amount and the benefit to that spouse’s credit record to continue paying those.

Or there may be a significant amount of joint debt, or debts owed by the reluctant spouse, resulting in a strong benefit for both to join in the bankruptcy. The assets may be well protected by exemptions, if the reluctant spouse is just given clear assurances by the attorney why there is no danger of losing whatever is precious to him or her.

And where there genuinely are assets at risk, or other reasons one spouse does not want to join in the other’s bankruptcy, there can be creative solutions. A Chapter 13 “adjustment of debts” by one spouse can often protect the other spouse through the “co-debtor” stay, allowing a co-signed debt to be paid ahead of other debts. A Chapter 13 filed by both spouses can protect the reluctant spouse’s assets with much less risk and much greater control than under Chapter 7. In rare circumstances one spouse can file a Chapter 7 case and the other a Chapter 13 one in order for each to meet their individual needs.

When both spouses are honest about their goals and concerns, an experienced and conscientious bankruptcy lawyer can usually find a sensible solution.

 

Married Couples under Chapter 7 and Chapter 13

Couples can file bankruptcy separately or together. That option comes with consequences, including whether to file under Chapter 7 or 13.

 

If you’re considering whether to file bankruptcy with or without your spouse, consider the following: 

  1. Each spouse has the legal right to participate in the other spouse’s bankruptcy or not to participate.
  2. There are consequences to filing separately or together. Consequences can affect:
    • the preservation of your assets;
    • protection from creditors’ collection activity;
    • the discharge of your debts; and
    • dealing with the IRS and any other income tax authorities.

Today’s blog post covers item 1, and the next ones cover the parts of item 2.

Each Spouse Has the Right to Join the Other’s Bankruptcy or to Not Join.

Married spouses often ask whether one of them is allowed to file a bankruptcy alone, without the other, especially when the debts are mostly one spouse’s. 

They sometimes also wonder whether they should nevertheless file together to protect the spouse without most of the debts.

Under bankruptcy law each person can file his or her own case alone, can file jointly with his or her spouse, or can decide not to file at all. All these choices are available to each spouse.

All these options don’t make the choice easier. In many situations it is in both spouses’ individual best interest to file a Chapter 7 “straight bankruptcy” or a Chapter 13 “adjustment of debts” together, but sometimes there are good reasons for one of them not to be part of that filing.

A Delicate Decision

It can be a delicate choice, legally and personally.

One spouse may owe most of the debt, because of a failed business or a prior divorce. One spouse may have run up some debt irresponsibly, maybe without telling the other. The other spouse may have assets that he or she would rather not expose to the bankruptcy process. One spouse may be unhappy about the other person already hurting his or her credit record, and so, sensibly or not, prefers not adding a bankruptcy to his or her credit record.

The marriage itself may well be at risk because of financial stress. We’ve all heard that financial problems are one of the top reasons for divorce. The survival of the marriage may hinge on making wise choices about whether to file bankruptcy, who should file, and whether to file a Chapter 7 or Chapter 13 case.

The Marriage Outlasting Chapter 13

There can be many good financial reasons to choose between Chapter 7 and 13, but to that sometimes it’s sensible to add one more factor: the strength of the marriage.

That’s because of the huge difference in the length of the two procedures. A Chapter 7 case is usually done in 3 to 4 months. A Chapter 13 one usually lasts 3 to 5 years. So a sensible question is whether your marriage will outlast a Chapter 13 case.

Chapter 13 payment plans can be adjusted mid-stream, and even converted into a Chapter 7 case at virtually any point. But it’s seldom wise for a married couple to enter into one when there is a serious risk that the marriage would end before the case would be completed.

The realities are that 1) many Chapter 13s do not get finished successfully because a lot can happen during the life of a case, even without an unsteady marriage; 2) unsuccessful Chapter 13 cases often have financial downsides, not the least being wasted time and money.

So, if the situation would normally call for a Chapter 13 case, but the marriage is not likely stable enough to survive to its completion, it may be more sensible to go with the Chapter 7 option after all.

 

More Complicated Debts under Chapter 7 and Chapter 13

Chapter 7 often is the better choice if you only have simpler debts, Chapter 13 is better with more complicated debts.

 

What Are the More Complicated Debts?

These debts tend to include those that

1) are not discharged (written-off) in bankruptcy,

2) are secured by collateral you want to keep but are behind on payments, or

3) are special ones simply handled better in a Chapter 13 “adjustment of debts” payment plan than under Chapter 7 “straight bankruptcy.”

Sometimes Chapter 7 gives you enough overall help that it’s the better choice even if you do have one or two of these more complicated debts. But often the extra leverage that Chapter 13 provides with these debts makes it the better choice, especially if you have more of these more complicated debts.

1) Debts Not Discharged in Bankruptcy

If you owe an income tax debt from a recent tax year, or fell a little behind on your support payments, those debts are among the kinds what would not be discharged in a Chapter 7 case. However, you may be able to file a Chapter 7 case and resolve the tax or support obligation by making monthly installment or catch-up payments directly with the creditor. Using Chapter 13 in this kind of situation might be unnecessary.

But if the amount you owe on debts that can’t be discharged or you are behind on is too large, or if the creditor(s) is (are) too aggressive, then Chapter 13 would likely be better. Why? Because it forces the creditor to give you more time to pay, and protects you, your income, and your assets in the meantime. Chapter 13 generally gives you up to five years to pay off or catch up on these kinds of debts.

So how can you tell whether a debt that can’t be discharged under Chapter 7 can be dealt with reasonably through payments to the creditor after the bankruptcy is over? When do you instead need the extra power of Chapter 13?

To answer this you need legal advice.  Every person’s financial situation is unique. So you need to talk with an experienced bankruptcy attorney to get sound advice about this.

2) Secured Debt, Behind on Payments

Similarly, if you want to hang onto your vehicle or home but you’re not current on the loan, Chapter 7 may do enough for you so you can quickly catch up and keep the collateral.

But how much time the creditor will give you to catch up depends on the creditor and on the circumstances. So here again you need to talk to the experienced bankruptcy attorney to get advice about whether you would likely be able to satisfy a particular creditor fast enough if you filed a Chapter 7 case.

Getting reliable information and counsel about these matters is crucial because the decision about whether to file a Chapter 7 vs. 13 will affect you for years. 

3) Special Debts Handled Better under Chapter 13

Chapter 13 has some other features for dealing with certain kinds of debts, features which are simply not available under Chapter 7. If one or more of these special features apply to you they can make Chapter 13 your best choice.

For example, under certain circumstances you can “strip” your second mortgage from your home’s title, so that you pay little or nothing on that second mortgage. If you qualify, this could save you tens of thousands of dollars, greatly reducing both the monthly and long-term cost of your home. This feature is potentially available only under Chapter 13.

A vehicle “cramdown”—in which the amount you pay on your vehicle is reduced by being based on its value and not on what you owe—is also available only in Chapter 13.

If you owe a co-signed debt, it can be favored over most of your other debts under Chapter 13 while your co-signer is protected. In contrast, in a Chapter 7 case the creditor would likely be able to pursue your co-signer because there isn’t this special protection.

These are just some examples of the special debts that Chapter 13 gives you special help with, which may induce you towards that option.

It’s a Delicate Choice

There is much more to deciding between Chapter 7 and 13 than looking at what kind of debts you have and whether those debts are “simple” or “complicated.” There are many other factors, and all kinds of combinations of circumstances. Use this rule of thumb—simple debts lead to Chapter 7, complicated debts lead to Chapter 13—simply as a starting point for you to think about and to take up with your bankruptcy attorney. 

 

Simple Debts under Chapter 7 and Chapter 13

Chapter 7 arguably deals with simple debts better than does Chapter 13. Are all or most of your debts simple ones?  

 

A Helpful Rule of Thumb

The point of bankruptcy is to help with your debts. There are certainly other considerations that come into choosing between these two options. But the type of debts you have is often the most important consideration.

This leads to an overly simple but still helpful rule of thumb:

  • Chapter 7 “straight bankruptcy” handles your simple debts better than does Chapter 13.
  • Chapter 13 “adjustment of debts” handles your more complicated debts better than does Chapter 7.

Chapter 7 is generally a simpler kind of bankruptcy than Chapter 13. After all it’s usually finished within about three months instead 3 to 5 years. Chapter 7 essentially writes off most of your debts but doesn’t help with debts that you either want to keep (like for your home or car) or can’t write off (such as recent income taxes and unpaid child support). Chapter 13 provides longer term help with those special kinds of debts and keeps you and your assets protected from your creditors during the 3 to 5 years.

Today’s blog addresses the simple debts side of this. The next one addresses the more complicated debts side.

Simple Debts

For our purposes here today we are including among simple debts those that are “general unsecured.” Those are ones that neither have any collateral securing them nor are among the “priority” debts which the law treats as special. “General unsecured” debts include most credit cards, medical debts, personal loans with no collateral, utility bills, back rent, and many others.

Simple debts can also be secured ones—backed up by collateral like your home or vehicle. They are relatively simple if you are current on the debt and want to keep the collateral, or simply want to give the collateral to the creditor.

Simple Unsecured Debts in Chapter 7 and Chapter 13

Chapter 7 is usually the better way to deal with “general unsecured” debts because most of them are simply discharged  (written off) forever in a quick procedure.

Chapter 13 instead usually requires you to pay a portion of these “general unsecured” debts. When you hear a Chapter 13 plan being referred to a “15% plan,” that means that the “general unsecured” debts are to be paid 15% of the amount owed on them.

Many courts allow “0% plans,” meaning that all the money being paid to creditors is going to secured or priority debts (plus trustee and attorney fees), leaving nothing for the “general unsecured” debts.

But even when a plan calls for 0% of these debts to be paid, that can change if your financial circumstances improve during the first three years after your Chapter 13 case is filed. In contrast, if your income increases a year or two after your Chapter 7 case is filed you would have no obligation to pay anything on the “general unsecured” debts that were discharged a year or two earlier.

Simple Secured Debts in Chapter 7 and Chapter 13

As for simple secured debts, Chapter 7 works fine if you are current on the payments, want to keep the collateral and maintain the regular payments. And if you are surrendering the collateral, Chapter 7 will almost always discharge any remaining debt, and do so quickly without the risk of having to pay any of it out of your future income.

Chapter 13 also deals well with simple secured debts where you want to keep the collateral and you’re current on the loan. But unless there are other reasons to file a Chapter 13 case, having such simple secured debts is usually not a valid reason to do so.

If you’re surrendering collateral to the creditor, any remaining debt after the surrender becomes “general unsecured” debt. It gets paid the same percentage as the rest of your “general unsecured” debts, instead of just being discharged in a Chapter 7 case.

This may not actually increase how much you are paying because often you pay ALL your “general unsecured” debts a certain amount based on what you can afford to pay. Having an extra debt from surrendered collateral just distributes the same amount of money over that one extra debt, simply reducing how much other “general unsecured” debts receive.

But sometimes having more “general unsecured” debt DOES increase how much you have to pay. That may happen years into your case if your income increases. It’s just much easier and less risky to deal with such debts in a quick Chapter 7 case.

The next blog: how not-so-simple debts are handled in Chapter 7 and in Chapter 13.

 

The First Question to Ask Your Bankruptcy Attorney

Once you’ve decided you need bankruptcy relief the next question is: “Can I keep everything I own under Chapter 7 or do I need Chapter 13?”

 

Your Assets Protected by Property Exemptions

Most people do not lose anything that they own free and clear when they file bankruptcy. That’s because the law protects certain categories of what you own, usually up to a certain dollar amount for each category. These protected categories are called “exemptions.” If everything fits within those “exempt” categories and amounts, then you can file a Chapter 7 “straight bankruptcy” and keep it all.

But if you own and want to keep something that is not covered by an allowed exemption, filing a Chapter 13 case would very likely protect it.

So ask your attorney whether everything you own is protected under Chapter 7 or whether instead you need the extra protection provided by Chapter 13.

A Good First Question

The reason this is a question that’s good to ask as soon as you’ve realized you need bankruptcy is that most people own only exempt possessions, and you should find out right away whether this is true for you. Usually this is something your attorney will be able to determine quite quickly for you. And if something isn’t protected, you and your attorney should address that at the very beginning of your decision-making process.

Not a Question to Answer by Yourself

This question is both an important one and much harder to answer than you might think.  

It’s an important question because:

1) If you’re in such financial trouble that you need to be filing bankruptcy, everything you own is likely valuable to you so you don’t want to put any of it at risk.

2) You don’t want to lose anything unnecessarily and there are usually ways to prevent that from happening if addressed early.

Determining whether all you own is exempt is much more difficult than you might think. It involves much more than just looking down a list of property exemptions and comparing them to what you own. It’s a lot more complicated than that because:

1) I f you are a resident of certain states the applicable exemptions are found in state law, while if you are a resident of other states you can choose to use exemptions found in either state or federal law.

2) After figuring out which exemption law applies, the law often does not clearly delineate what assets fit within each exempt category. Besides the language of the statutes often being archaic and unclear, what assets fit or don’t fit within exemption categories can depend on state or federal court interpretations or even on the informal practices of the local bankruptcy trustees or judges.

3) The exemption laws change—the statutes themselves, the published and unpublished court interpretations, and the informal practices as trustees and judges change, sometimes with little or no notice. It’s impossible to keep up with these without working in the field full time.

4) If you’ve moved in the last couple years from one state to another, sometimes you apply the exemptions of your prior state and sometimes those of your new state.  

Chapter 13 as a Possible Way to Save Non-Exempt Assets

If you find out that something you want to keep is not exempt and protected, then Chapter 13 MAY be a worthwhile tool for keeping it. But first here are some questions to ask your attorney:

1) Is the much longer time that a Chapter 13 case would take (3-to-5 years instead of about 4 months for Chapter 7) worth the benefit of keeping that (those) asset(s)?

2) Can those unprotected assets instead be protected better by some appropriate pre-bankruptcy planning?

3) Can those assets instead be protected in a Chapter 7 bankruptcy by paying a reasonable amount to the bankruptcy trustee in return for keeping the asset, and would the trustee allow that to be paid in reasonable monthly payments?

4) If you would pay money to the trustee in this way, who would receive that money? Might at least some of it be paid to where it would benefit you—such as to pay income taxes or some other debt that would not be written off in a Chapter 7 case and so you would have to pay anyway?

5) And lastly, would Chapter 13 help you in other ways beyond protecting your assets—enabling you to keep your home or vehicle(s), or to pay income taxes or some other debts you’d have to pay anyway—so that its accumulated benefits would make the extra time it takes worthwhile?