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Which Option Is Best For Me…Chapter 7 or Chapter 13?
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.
Head of Household Exemption in Bankruptcy
If you decide to come in and speak with an attorney regarding a bankruptcy filing it is likely that the attorney will ask you how many children you have living with you that are under 21. These children that are living with you that you are helping take care of are your dependents and will be listed as such in your bankruptcy filing.
You may wonder why that is important. The bankruptcy laws are set up to help the debtors protect certain assets. The attorney that prepares your petition will use these laws to exempt certain property (such as cars, furniture, money in bank accounts and even your home) from your bankruptcy estate. That is, the Trustee would not be able to get a hold of these assets, liquidate them and pay off your unsecured debt with the money they collect. That is good news for the debtor.
It is obviously important then for a bankruptcy attorney to know the law and the exemptions that are available to use. Section 513.430 sets out the “Head of Household” exemption and it states that the debtor is allowed to claim a $1250 exemption if they are head of household and they may also claim an additional $350 for each unmarried dependent child under the age of 21. This means that if you want to file a Chapter 7 bankruptcy, but you have some money in the bank or are expecting a fairly large tax refund, your attorney may still be able to help you protect these assets.
Here is how the exemption would work…debtor wants to file a Chapter 7 to stop a wage garnishment, but they are expecting a $2000 tax refund in 2 months. That tax refund is an asset of the bankruptcy so the Trustee could require you to turn it over so that he or she could pay off your creditors with it. However, you have 3 children under the age of 21 that are all living at home with you. Your attorney can apply the Head of Household exemption for $1250, plus $350 per child (for a total of $1050 for 3 children). These would be a total of $2300 that the law allows you to exempt, which would cover the entire tax refund that you are to receive in 2 months. That means you would not have to wait to file your bankruptcy, you could stop the garnishment right away and still be able to retain all of your tax refund.
These exemptions are important and you obviously will want to protect as much property as you can. That is why, if you are thinking about filing for bankruptcy, it is very important to speak to an experienced bankruptcy attorney. We offer free consultations at several locations in the St. Louis area. Please contact us if you would like to speak with someone about your options.
Can I Keep My Vehicle If I File Bankruptcy?
A common concern for debtors that are considering filing for bankruptcy is whether or not they are going to lose their vehicle if they file a bankruptcy. The answer to this question depends on several factors so it would be in your best interest, if this is a concern of yours, to consult a bankruptcy attorney in your area.
If you are filing a Chapter 7 bankruptcy, which will discharge all of your unsecured debts, you still may be able to keep your vehicle, but it mostly depends on whether or not you have equity in that vehicle. For example, if you own a vehicle without a loan on it and your vehicle is worth $5000, the trustee will take an interest in that vehicle. The trustee’s job is to find assets, liquidate them and then disperse the money to unsecured creditors to pay off your bills. In Missouri, we have exemptions that can protect your personal property. If you are a single filer, you can protect up to $3000 of equity in your vehicles. If you are a joint filer with your spouse, the exemptions allow you to protect a total of $6000 in your vehicles. To sum it up, if you have a loan on your vehicle and your vehicle is worth less than what you owe on it or if your vehicle is worth more than what you owe, but less than $3000 more, then you will not have any issues keeping your vehicle. If your vehicle does have equity, then you have a couple of options. Those options include surrendering your vehicle to the trustee, making a cash offer to the trustee that will enable you to keep the vehicle or filing a Chapter 13 bankruptcy and paying off the equity through the course of the Chapter 13 plan.
A Chapter 13 bankruptcy is a good option if you have equity in your vehicle. You could pay back the equity over the course of the plan and that money would go to some of your unsecured creditors to help pay them back what you owe them. Additionally, a Chapter 13 can also save a car if you are behind on your payments or, in certain circumstances, if your car has been repossessed. If you were to file a Chapter 13 bankruptcy, your loan balance for your vehicle will be put inside the plan and paid off over 60 months at the court’s interest rate, which is often a lower interest rate than you received in your original contract with your lender. Additionally, if you are having a hard time making your car payments because they are too high, a Chapter 13 can stretch those payments out over 5 years and make it more affordable.
To summarize, the bankruptcy laws are written to give the debtor an opportunity to protect their personal property, but the laws can be complex and it is always a good idea to speak to an attorney so you know exactly what your rights are in regards to your vehicle and any other property you might own. If you have questions about this article or anything else related to bankruptcy, it is my recommendation that you consult a St. Louis Bankruptcy Attorney today. We offer free consultations at a number of locations in the area.
I’ve filed Bankruptcy Before, Can I file Again?
Yes, you can file bankruptcy multiple times. In fact, there is no limit to the number of times that you can file. However, if you have received a discharge in a previous case, a certain amount of time must pass before you can receive a discharge again. The amount of time that must elapse depends on which chapter you previously filed, and which chapter your plan on filing now.
If you have previously filed a Chapter 7 bankruptcy, you must wait eight years to file and receive a discharge in a new Chapter 7. If you have filed a Chapter 7 in the last eight years and received a discharge you can still receive the protection of bankruptcy (automatic stay) by filing a Chapter 13. If more than four years has elapsed since you filed your Chapter 7, you can receive a discharge in your new filing.
If you previously received a discharge through a Chapter 13, you can receive a discharge in a Chapter 7 if six years has passed since your Chapter 13 filing. Note, that the clock starts as soon as your case is filed, not when you receive your discharge. If six years, has not passed, you can receive a discharge through another Chapter 13 as long as two years has passed since the previous Chapter 13 filing.
But what if you can’t receive a discharge? Can you still benefit from filing? Absolutely! Student loans and taxes are generally not dischargeable in a Chapter 7. After your Chapter 7 has concluded, student loan creditors can resume garnishing up to 25% of your paycheck. The IRS is even worse. They can take over 90% of your paycheck to pay on back taxes. Even though you may not be eligible for a discharge, you can still receive the protection of bankruptcy by filing a Chapter 13 and your student loan creditors will not be able to garnish your wages. A small monthly payment may give you up to five years of protection from lawsuits, garnishments, levies and liens.
Just because you have previously filed a bankruptcy doesn’t mean you can’t file again. Even if you can’t receive a discharge, you can still enjoy the protection that bankruptcy provides. Schedule your appointment today with one of our experienced bankruptcy attorneys. He or she will be able to evaluate your situation and determine what is best for you.
THE AUTOMATIC STAY – BANKRUPTCY PROTECTION
This is guest article by Attorney Adam Schachter, a bankruptcy attorney in Houston Texas.
What is an Automatic Stay
As soon as a bankruptcy is filed, with a couple of narrow exceptions, something called the “automatic stay” goes into effect. The automatic stay is found in the bankruptcy code at 11 U.S.C. § 362(a) and it stops most collection efforts. Once a bankruptcy is filed, the automatic stay prevents repossessions and foreclosures and stops lawsuits. It ends the harassing phone calls and letters and provides an immediate sense of peace.
The automatic stay is one of the greatest benefits of filing bankruptcy. Its purpose is to give the debtor in bankruptcy a break from the seemingly endless efforts of collectors. This break is to give the debtor an opportunity to regroup and get the best chance at a fresh start.
Once a creditor has notice of the automatic stay it MUST abide by it. It is not allowed to continue calling or sending bills. It cannot take property from you. If a creditor is found to be in violation of the automatic stay by the court, you may be entitled to damages as well as payment of your legal fees. What is key is that you are able to prove that the creditor violating the stay had notice. Hence it is very important to make sure that the creditor addresses used in your bankruptcy filing are correct. Be sure to work closely with your lawyer to get it right.
Automatic Stay is not always Automatic
11 U.S.C. § 362(a) of the bankruptcy provides an automatic stay against all sorts of collection activity.
Note that the automatic stay is not always automatic. If you filed a bankruptcy that was dismissed by the court in the 12 months prior to filing another bankruptcy, the automatic stay is good for only 30 days. A motion must be filed to extend the stay past 30 days and you must be able to show that the circumstances that caused the dismissal of the previous case has changed such that this case will be successful. If you had 2 or more bankruptcies dismissed in the twelve months prior to filing another bankruptcy, there is no automatic stay. You must file a motion to have one imposed and also show that the circumstances of the prior cases have changed such that the present case should be successful.
If you find yourself in this situation we believe you need to brutally honest with yourself regarding whether bankruptcy is right for you and whether your case can be successful.
Exceptions to the Automatic Stay
11 U.S.C. § 362(a) of the bankruptcy code provides an automatic stay against all sorts of collection activity. What a lot of people (including many attorneys) don’t know is that there are 27 exceptions to the automatic stay found in 11 U.S.C. § 362(b). Now before you jump to conclusions in think the automatic stay is not as great as we’ve mentioned, understand that most of the exceptions make good sense and 16 of them almost never apply to every day people.
The common exceptions that affect every day people are:
The automatic stay does not stop criminal proceedings
It does not stop most family court proceedings
It does not stop the assessment of taxes or audits
It does not stop the payroll deduction of repayment of a 401k or similar loan
It does not stop an eviction if the order of eviction has already been signed
One important note that many people are not aware of is 11 U.S.C. § 362(b)(11): the automatic stay does not prevent the presentment of a negotiable instrument. “Negotiable instrument” is lawyertalk for “cashing a check.” This could be a big deal, especially if you have payday loans or other loans where collectors have asked you to give them a signed check. If you are in this situation, it’s best to simply close that particular bank account prior to the bankruptcy filing.
