Which Bankruptcy? Chapter 7 or Chapter 13 ? Do I Need a Helping Hand or a Fresh Start?
Chapter 7 bankruptcy is often referred to as the fresh start bankruptcy. It allows the client to receive a discharge of all dischargeable debts. In exchange, the client will surrender any non-exempt assets to a trustee to be liquidated to pay creditors. If your assets are exempt, you will be able to keep those assets. However, this does not mean that the client will keep the exempt asset after bankruptcy. If the asset is subject to the lien of a creditor, such as a home mortgage or auto loan, the client will have to pay those debts or surrender the collateral to the creditor.
Chapter 13 bankruptcy is often a better alternative for my clients because it provides a helping hand. It is a consumer bankruptcy that requires some form of repayment to creditors over a three to five year period. Most of my clients think that Chapter 13 is a repayment plan that will require them to pay all debts, in full, over a period of time. This assumption is mistaken. Only in rare Chapter 13 cases will a client have to pay all of their debts in full. While some debts may have to be paid in full, usually at reduced interest rates, others can usually be paid nothing.
Circumstances where Chapter 13 is a Better Option
1) Ability to Pay: Not every client can automatically qualify for Chapter 7. Chapter 7 has an income and expense test to determine whether you can pay your debts . A Chapter 13 may be your only option if a review of your income and expenses demonstrate that you cannot qualify for a Chapter 7. If your income prohibits you from qualifying for a Chapter 7, then a Chapter 13 will allow you to craft a plan that will take into account your monthly living expenses. Typically, you will pay little, if anything, back to your unsecured creditors, i.e. credit card debt.
2) Ineligible for a Chapter 7 Discharge: If you have filed a Chapter 7 and received a discharge within the last eight years, you are not entitled to receive a Chapter 7 discharge. If you have filed a previous Chapter 13 and received a discharge within the last six years, you may not be eligible for a Chapter 7 discharge.
3) Catch Up on Arrears: If you are behind on your mortgage, child support or taxes, Chapter 13 Bankruptcy provides you the ability of getting current and repaying the amounts over three to five years interest free. This is often a very attractive option because under many circumstances, you pay little, if anything, back on credit cards or medical debts while having a great mechanism for dealing with the debt that you actually want to repay.
4) Prevent Property Loss: While Chapter 7 will stop a repossession, foreclosure and other collection actions (garnishments and bank attachments) by creditors, the relief is temporary. If you are not current with your car or house payments, the creditor may, and probably will, ask the Court for permission to restart those actions. On the other hand, a Chapter 13 can provide a solution which enables you to keep your property, such as your home or car, as long as you pay off the arrears on the mortgage over three to five years or pay off the car through your plan. Your Chapter 13 plan can also provide for payment of all your outstanding tax debt and stop the government from seizing your wages. Your plan can address any child support arrearages that you may have, but cannot stop the state from collecting future payments after the case is filed.
5) Restructure Loans: In most cases, Chapter 7 limits your choices to either giving up your car or home, or signing a reaffirmation agreement with the creditor, making your loan an exception to discharge. In Chapter 13, you have multiple options. First, unless it is your home’s mortgage, you can lower the interest rates and save yourself a ton of money. For example, if you are paying 18% interest on your car loan, a Chapter 13 may allow you to reduce that amount to a much more reasonable interest rate, such as 5%. Second, if the car was financed over 910 days before filing you may reduce the amount you repay to the value of the vehicle. In a Chapter 13 plan, if the car is worth $3000 and you owe $12,000 on the vehicle, you can reduce the principal repayment to $3000. By being able to modify the interest rates and principal balances, you could save thousands of dollars that you might pay through a Chapter 7. This option is very helpful to clients who gave their car, lawnmower, or other personal property as collateral for a loan.
6) Protect Property: A Chapter 7 will only allow you to retain exempt property from your trustee. North Carolina exemption laws that protect your real and personal property are somewhat generous, but that does not mean that they can protect all property. If there is no exemption for the property or the exemption does not cover the full value of the asset, the property can be sold by the Chapter 7 trustee. A Chapter 13 will prevent a trustee from liquidating your non-exempt property. For example, if you have $5000 worth of property that is not protected by the exemption laws, your plan will provide to pay that amount over the next three to five years to your creditors. Chapter 13 allows you to protect equity in your home, car, boat or any asset the exemption laws do not fully protect.
7) Lien Stripping: Chapter 7 allows you to avoid, or strip, a non-consensual lien that impairs your state law exemption. You can strip a lien off your home if (a) it is a non-consensual lien, i.e. judgment lien; and (2) it impairs your exemption, meaning that there is no equity above your exemption to secure the judgment. If there is equity above your exemption, the judgment lien will not be fully removed or removed at all. Chapter 13 allows you to strip both consensual and non-consensual liens. The above same rules apply in Chapter 13, but unlike Chapter 7, it allows you to file a plan that can allow the stripping of a consensual lien. For example, your home is with $100,000 and you owe a first mortgage in the amount of $110,000. You have a second mortgage on the property in the amount of $30,000. In a Chapter 13, you can propose a plan that strips the second mortgage in its entirety from your home. Once you complete the plan and the discharge is issued, the creditor will remove the second mortgage from you home.
For some clients, a helping hand is what is needed. They just need a little help from the Court to repay what they can to their creditors. Chapter 13 is often a useful option to clients who need the assistance to save their home and car. They are simply looking for that helping hand to allow them to do so.
Contact Us Today
Dealing with financial complications can be overwhelming. C. Scott Kirk can help advise you during these stressful circumstances. If you have additional questions regarding bankruptcy, contact C. Scott Kirk, Attorney at Law, PLLC by calling (252) 689-6249 to schedule your personal consultation. You can learn more at csklawoffice.com.