If I qualify for a Chapter 7 bankruptcy, why might I choose to be in a Chapter 13 instead?
While a thorough analysis of your financial status is necessary to come to any final conclusions about which Chapter will benefit you the most, here are some common reasons why you might choose a Chapter 13 payment Plan rather than the more immediate Discharge of Debt available under a Chapter 7:
- "Save the Home" Chapter 13 One of the most useful types of Chapter 13 bankruptcy case is the ability to pay back past due house payments over enough time and at a monthly payment amount that your budget can afford and prevent the foreclosure and sale of your home. Under a "Save the Home" Chapter 13, where the home is at risk of, or is already in foreclosure, the law allows us to pay all of your past due house payments in monthly installments over a 3 to 5 year period of time. Imagine calling up your mortgage lender and telling them you promise to start making your regular monthly payments from now on and, on top of the regular payment, you will pay 1/60th of the amount you were behind on until it is all caught up in about five years. Also, that they will have to agree to not charge you any interest or late fees on the past due amount while you pay those 1/60th payments over 5 years. Do you think they would agree to those terms? In a "Save the Home" Chapter 13 that is exactly what can be proposed and your lender, in most cases, must accept those terms and conditions.
- Appearance of the Ability to Pay (§707(b)) Chapter 13 Even if you qualify to file under Chapter 7 you may choose (or be forced into) a Chapter 13 if, after balancing your take home pay against your actual, allowed living expenses, you have sufficient net disposable income to pay at least 25% of your unsecured debt over a 5 year Plan.
- Over Median Chapter 13 On October 17, 2005 Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act which, among other things, implemented an income threshold and means test to create a presumption that people seeking relief under bankruptcy law were abusing their right to do so if they earn gross wages in excess of IRS and Census Bureau standards. See Do I Qualify for those standards.
- Prior Chapter 7 in Past 8 Years If you received a discharge of your debt in a Chapter 7 case filed (not discharged) less than 8 years ago, you may not file another and must choose a Chapter 13 if you are seeking protection again (certain other restrictions also apply).
- Over Exempt Asset Chapter 13 In any bankruptcy you are allowed to keep a generous but limited amount of your assets in order to facilitate your "fresh start." Sometimes the value of one's assets exceeds those limits. If this happens, one of three options is available. First, you can choose not to file a case in bankruptcy at all. Try to sell or barrow against your assets and use the money to settle your other debt. Second (assuming you qualify) you can file a Chapter 7 case and surrender the over exempt assets to the Trustee for distribution to you unsecured creditors on a pro rata basis. Finally, if you would rather not surrender your over exempt assets, you can file a Chapter 13 payment Plan case and, treating your unsecured creditors the same way they would have been treated had you chosen to file a Chapter 7, pay into the Chapter 13 pot, the same amount that would have been paid for the creditors' benefit - the over exempt asset amount - but over time, and in an amount your budget can afford.
