The Most Important Choice in Bankruptcy
Nov. 23, 2015
Chapter 13 takes years instead of months, and costs more, so you do a Chapter 7 when you can and a Chapter 13 when you must, right?
No, not really.
These two options each have advantages and disadvantages that need to be carefully matched to your immediate problems and to your short- and long-term goals.
The length of a Chapter 13 case can itself be an advantage when you’re trying to buy time or stretch payments out over a longer period to reduce what you pay each month. The likely greater cost of Chapter 13 is sometimes far outweighed by how much you can save through that procedure—possibly even by tens of thousands of dollars. But in other situations Chapter 7 may be just what you need.
Be Informed and Open-Minded
Inform yourself about your options before seeing an attorney (such as by looking through our website). But it’s also wise to have an open mind about those options when you meet with an attorney for legal advice. You may simply not know about a crucial advantage or disadvantage that could swing your decision one way or the other, sometimes contrary to your expectations. So don’t be too emotionally invested in going in one direction when the other may actually be the better choice.
The Easy Choice, and the Sometimes Not So Easy Choice
Sometimes the nature of your debt problems and your other circumstances push your decision strongly towards either Chapter 7 or 13. Sometimes you may even only qualify for one, and that one provides what you need. Or you may qualify for both, but still everything points towards either Chapter 7 or 13. So the decision could be very easy.
But you may well qualify for either a Chapter 7 or Chapter 13 case, with advantages under each one. So it can come down to a very personal choice.
Two simple examples will make this clearer.
First, let’s say you are behind on your home mortgage and wanted to keep the home. A Chapter 7 case would likely write off all or most of your other debts, and do so in just 3 or 4 months. You’d likely have a few months, maybe up to a year or so, to catch up on the mortgage.
In contrast, a Chapter 13 case would give you 3 to 5 years to catch up. And it may allow you to avoid paying most or all of a second mortgage by “stripping” it off your title, saving tens of thousands of dollars. But you wouldn’t be writing off any of your debts until the end of that 3-to-5-year period.
This choice between these two options turns partly on factual issue like whether you have a second mortgage that could be “stripped” and how much you’re behind on the mortgage payments. But on a personal level it comes down on how important it is to you to keep the house. And how much you’d be willing to risk in being able to do that though Chapter 7 by negotiating a relatively quick catch-up of past-due mortgage payments instead of getting much more time and far greater protection through Chapter 13.
A second example: let’s say you owed some past-due income taxes to the IRS that could not be written off under either Chapter 7 or 13. You could file a Chapter 7 case and write off all or most of your other debts for that you could focus your financial resources on the IRS. Right after your bankruptcy case was over you’d arrange with the IRS to make monthly payments to pay off that tax debt, plus ongoing interest and penalties, through monthly payments.
Or you could file a Chapter 13 case and pay those taxes through a formal plan incorporating all of your creditors (with possibly little or even nothing going to some creditors) through a monthly payment based on your budget, usually avoiding additional interest and penalties on the taxes, all the while being protected from the IRS. But you would pay more for these advantages.
This choice also depends on the facts, such as how much tax you owe and how much you could afford to pay each month once your Chapter 7 case was completed. But then it comes down to more personal questions like how confident you’d be that your present income and expenses would stay stable throughout the repayment period so that you could reliably make those payments without the additional protection of an ongoing Chapter 13 case.
Regardless whether the choice between Chapter 7 and Chapter 13 ends up being easy or difficult, you need to be well-informed about their differences. So the next few blog posts will look at some of the key differences between them.