It is my job to know whether a Chapter 7 or a Chapter 13 is the better option for my clients. The questions that I ask at the initial consultation asked to make this determination. Most clients want to file a Chapter 7, but that is not always the best option for them. Each case is different and the rest of this blog will show the differences between the two options so you can have a better understanding of both.
A Chapter 7 is less expensive than a Chapter 13 and it is cheaper. In my initial consultation it is important for me to determine what type of debt my clients have. There are three types of debt: priority, secured and general unsecured. Priority debt consists of recent tax debt and domestic support obligations, such as alimony or child support. If someone owes taxes from the last few years and/or a domestic support obligation, a Chapter 7 will not get rid of this debt. Secured debt is another type of debt. Secured debt consists of car loans, mortgages or statutory liens. Secured debt can be taken from you if you are not making the payments. If the client is current with their mortgages and car loans a Chapter 7 may still be a good option for them. However, if they are delinquent on secured debts, a Chapter 13 may be in their best interest. Alternatively, if someone has a high interest rate on a vehicle or the monthly payment leaves them with no disposable income, a Chapter 13 may be a good way to stretch out those payments on the vehicle to free up some other money to take care of other things they may need or start savings. The last type of debt is unsecured debt. Unsecured debt is credit card debt, medical bills, old utility bills, pay day loans, etc. This type of debt is discharged in a Chapter 7, which means it is wiped out. This type of debt is the reason that many potential clients feel they need to file bankruptcy.
As I said, Chapter 7’s are quicker than Chapter 13’s. They usually last 4 months or so, while the Chapter 13 will last from 36-60 months, but Chapter 13’s do have some advantages over Chapter 7 bankruptcies. Below I will list some of the reasons why people may want to file a Chapter 13, rather than a Chapter 7.
For some people, a Chapter 7 is not an option. They may not be eligible. In order to be eligible for a Chapter 7 you are not allowed to have filed one in the last 8 years. Additionally, some people make too much money or have too much monthly disposable income to be able to file a Chapter 7. If any of these restrictions apply, you can still file a Chapter 13. Another great reason to consider a Chapter 13 is if you are behind on your mortgage or car payment. Rather than lose your house to foreclosure or your car to repossession, you could file a Chapter 13 and get protection under the law. A case filing will stop all attempts at the mortgage company selling your house or the car creditor picking up your car. A Chapter 13 will also allow you to catch up on your back mortgage payments over the course of 5 years and stretch out your car payments over the same amount of time.
Chapter 13 bankruptcies are also a great option for people who are “upside down” on their house and have a 2nd or even a 3rd mortgage. In a Chapter 13, if you have no equity in your house in regards to the 1st mortgage, then we can “strip off” the second mortgage. That means these 2nd or 3rd mortgages would become unsecured debts and could be discharged at the end of the Chapter 13 and you would still be able to keep your house. Some people are also often behind on tax debt or domestic support payments and need time to catch up. They might be afraid of a bank levy or a criminal charge. A Chapter 13 will give them the time to become current without facing further penalties. These debts can be paid through the plan in a structured way to make it easier to handle for the debtor.
A Chapter 13 is also the only option when you are trying to discharge a debt that was assigned to you in a divorce decree. It is a good idea if you have gotten a divorce to show the decree to your attorney. If you have assigned debts through that divorce that you want to discharge it cannot be done through a Chapter 7. A good, knowledgeable bankruptcy attorney will be able to sort through all of this paperwork and let you know what the best option is for you.
Additionally, I often have clients who have filed a Chapter 7 bankruptcy in the last 8 years, but they are getting garnished by a new creditor. They come to see me hoping to stop the garnishment but cannot file a Chapter 7. Often it is a good idea to file a Chapter 13 to stop the garnishment. We can always file a Chapter 7 later to discharge the debt, but the Chapter 13 will stop the garnishment to free up money so you can pay your rent and utilities and not get further behind on your bills. These garnishments are often up to 25% of your paycheck, which can be devastating to many people.
Another advantage of Chapter 13 bankruptcies is that they can often be cheaper up front since attorney fees can be paid over the course of 5 years. We are very willing to work with clients on payment arrangements in a Chapter 13 if they are employed and have the ability to make the monthly plan payments to the Trustee.
This decision on what kind of bankruptcy to file is a complicated one and should not be taken lightly. We have experienced lawyers here that deal with all types of cases every single day. It is our job to analyze your debts, assets, income and expenses and have in-depth knowledge of the bankruptcy code. If you are considering bankruptcy or would like to speak with an experienced bankruptcy attorney in the St. Louis area, please do not hesitate to give our office a call. We offer free consultations at five different locations across the St. Louis area.