These two options are very different. They each have their advantages and disadvantages. Sometimes it’s quite clear which one is better for you, but other times it’s more up in the air. Some of those advantages and disadvantages are often obvious. But there may be other important ones that you don’t know about. That’s why you should discuss both alternatives with your attorney with an open mind even if you think that one is the right one for you.
“LIQUIDATION” VS. “ADJUSTMENT OF DEBTS”
Practically speaking Chapter 7 fixates on the moment in time when your case is filed, while Chapter 13 focuses instead on the span of the next few years.
Chapter 7 addresses the assets you own and the debts you owe as of the moment your case is filed. Most or all of your assets are protected through “exemptions,” and most or all of your debts are discharged (legally written off). Usually you get to keep everything you own, because everything is “exempt.” But if not, your bankruptcy trustee would have the right to take possession of whatever is not “exempt,” sell it, and use the proceeds to pay your creditors some of what you owe them.
While Chapter 13 for some purposes also addresses your assets and debts as of the day your case is filed, it mostly focuses on a three-to-five-year plan for dealing with your creditors over that period of time.
DEALING WITH SECURED CREDITORS
Some debts are “secured” by collateral, and how these are treated under Chapter 7 and 13 is one very important difference between them.
Under Chapter 7, you usually have the choice to either keep or surrender the collateral. So you may determine that you can no longer afford your mortgage or vehicle payment, and so surrender the house or vehicle to that creditor. Or you can continue making the payments and retain the collateral. However, if you are not current on a secured debt, you will not have much time to bring it current. A lot will depend on the flexibility of the creditor.
Under Chapter 13, you usually have much more power to force your secured creditors to be flexible. If you are behind on your mortgage, generally you will be allowed to slowly pay the amount of your arrearage over the course of your entire three-to-five year plan. If you are behind on your vehicle loan, you would either have a substantial amount of time to bring it current, or in some situations you would not need to do so at all. Also, if you have a second or third mortgage, you may be able to save a substantial amount of money by “stripping” that mortgage off your title-turning that debt secured by your home into one that is no long secured-as long as your home is worth no more than your first mortgage balance. And you may be able to reduce both your monthly vehicle loan payment and the overall amount to be paid on that loan, if the debt is greater than the vehicle’s value and you’ve had the loan for more than two and a half years. These features are not available under Chapter 7.
DEALING WITH SPECIAL UNSECURED CREDITORS
Some debts cannot be discharged in bankruptcy, and how these are treated under Chapter 7 and 13 shows another set of very important differences between them.
Under Chapter 7, certain income taxes, child or spousal support, student loans, or some other special debts will not get discharged. So you will need to deal with them afterwards. Sometimes that’s acceptable, if the remaining debt is relatively small and manageable after discharging your other debts. For example, if you owe only a few hundred dollars in recent income taxes to the IRS, or even a few thousand, you can enter into a reasonable payment program and take care of that over time. But you would be largely at the mercy of the creditor-the IRS in this example-as to the amount of the monthly payments and what would happen if changed circumstances in the future made you unable to keep up the agreed payments.
Under Chapter 13, you have tremendously more leverage regarding your payments to these creditors. You arrange through your attorney to pay those kinds of special debts through a court-approved plan. That plan is usually based on what you can actually afford, not on whatever the IRS or other creditors would otherwise require you to pay. And throughout the time your plan is in effect, you are protected from collection efforts by all your creditors. This continued protection is particularly helpful because these kinds of creditors-taxing authorities and support enforcement agencies, especially-often have extraordinarily aggressive collection powers. Also, with certain kinds of debts-such as income taxes-you will pay less because interest and penalties usually do not continue accruing.
Chapter 7 tends to be better for simple cases, while Chapter 13 is better for more complicated ones. That’s oversimplifying but has some truth to it. More accurately, Chapter 13 gives you more power and flexibility with certain kinds of creditors. And it helps in those unusual circumstances that you own and want to keep assets that are not “exempt.” But if you do not have those circumstances, Chapter 7 would likely be the faster and better option.
If you are in the Dallas area and have questions about your choices between Chapter 7 and 13, please contact us at The Law Offices of Roger Fuller. We provide a no-charge consultation. We have helped hundreds of Texans make good decisions about the best way to deal with their debts. Call The Law Offices of Roger Fuller at 214-516-6187.