Chapter 13 Advantages

Some Advantages to the Debtor by Choosing
To File Under Chapter 13 Rather Than Chapter 7

1. Homes - Arrearages on home mortgages can be paid out over a period of 3 to 5 years. This applies to arrearages on real estate taxes also. Federal tax liens on homes can also be paid out in similar fashion. The filing of a petition in bankruptcy in both Chapter 7 and Chapter 13 will stop state mortgage foreclosures. However, in Chapter 7, the mortgage company will be able to get relief from the Bankruptcy Court to go forward with its foreclosure in a fairly short time period. Additionally in Chapter 7, the Bankruptcy Court cannot generally impose a requirement on the mortgage company to let the debtor pay his mortgage in any particular fashion, other than as called for by the note and mortgage. In Chapter 13, however, the Bankruptcy Court normally will enter an order permitting the Chapter 13 Trustee to make regular monthly payments to the mortgage company from the funds paid to the Trustee by the debtor pursuant to the debtor's Chapter 13 Plan. Therefore, Chapter 13 is an effective way for the debtor who is serious about keeping his home not only to stop a foreclosure, but also to get up to five years to make up the back payments while at the same time making regular payments going forward. All payments are made through the Chapter 13 Trustee. The same relief is available regarding manufactured homes.

2. Motor Vehicles – If a debtor is behind on his automobile payments but the car has not yet been repossessed, a Chapter 13 bankruptcy can stop the repossession and allow the debtor to keep the car by continuing to make the regular payments. In Chapter 13, the debtor can sometimes reduce the amount that the debtor has to pay the lender for the vehicle if the debtor has owned the vehicle for more than 910 days. In that situation, the lender will have a secured claim only for the lower of the value of the vehicle or the debt. For example, if the vehicle is worth $3,000 and the net pay-off on the debt as of the date of the filing of the Chapter 13 petition is $5,000, the lender will have a secured claim for $3,000 and an unsecured claim for $2,000. The secured claim can be paid out over the life of the Chapter 13 Plan that can be from 3 to 5 years. This will quite often lower the monthly payment on the vehicle from the payment called for by the contract. This same treatment is available for motorcycles, boats, and furniture, and in some instances even manufactured homes. In many cases, the interest rate will be reduced.

3. "Buy Back" from the Chapter 7 Trustee is Too Great - In a Chapter 7, if the debtor has non-exempt assets he wishes to retain and the value of those assets is too great, it may not be practical or feasible for the debtor to "buy back" the excess value of the non-exempt assets from the Chapter 7 Trustee. The Trustee will only allow the debtor a period of 3 to 12 months to accomplish the "buy back." So, for example, if the buy back amount is $6,000 and the Chapter 7 Trustee will give the debtor only 3 months (at $2,000 per month) or even 12 months (at $500 per month) to accomplish the buy back, the debtor may find that his family budget will not allow him to pay it. In Chapter 13, however, the debtor will normally by permitted to retain the assets and pay enough money into the Chapter 13 Plan each month to make sure that the unsecured creditors receive at least as much as they would have if the case had been filed under Chapter 7. For example, if the buy back in Chapter 7 was $6,000, in a 3-year Chapter I3 Plan the buy back would be about $5,500 (reduced by approximately $500 that the Chapter 7 Trustee would receive if the case were processed in Chapter 7). This would result in a monthly payment to be made through the Chapter 13 Plan of approximately $153 per month - an amount that may fit the debtor's budget where $500 to $2,000 per month may not. A debtor who is in Chapter 7 faced with this type of situation may file a motion to convert the Chapter 7 to a Chapter 13 and implement this approach.

4. IRS Debt - Certain income taxes, if they are old enough, are eligible for bankruptcy discharge. In this instance, the tax, the penalty and the interest all are discharged and the IRS would be stopped forever from trying to collect it. There are several time tests involved, and premature filing of a bankruptcy case (whether in a Chapter 7 or 13) can preclude a debtor from getting the taxes discharged. A debtor with taxes over 3 years old should seek the advice of an experienced bankruptcy attorney who handles IRS related bankruptcy cases, because IRS transcripts will need to be pulled and the various time tests applied before the bankruptcy is filed. For debtors who owe taxes but may not have filed returns there is the potential in Chapter 13 to get those taxes discharged, but legal counsel needs to be sought before a bankruptcy case is filed. If taxes are not old enough for discharge, the taxes may still be paid out over the life of the Chapter 13 Plan. If the IRS has not filed a tax lien in the public records, or if filed, if there are no assets for the lien to attach to, and if the taxes are not old enough for discharge, the taxes will be treated as "priority claims." In Chapter 13, priority taxes will not accrue any interest or penalty after the Chapter 13 case is filed. If it is a priority claim, whatever is owed to the IRS on the date of filing can be paid out through the Chapter 13 Plan. For example, if the IRS has a priority claim for $5,000, that claim can be paid out at the monthly rate of $138.89 in a 3-year plan; $104.17 in a 4-year plan; or $83.34 per month in a 5-year (60 month) plan.

5. Divorce Related Debt - If a divorce has taken place prior to a bankruptcy filing, Chapter 13 may afford the debtor relief that may not be available in Chapter 7 as to debt from the marriage that the debtor was required to pay as part of the divorce settlement or the court's ruling. This type of obligation imposed on one of the parties to the divorce is referred to in bankruptcy and divorce law as part of the "property settlement." A debtor who seeks to get this obligation discharged may have to litigate in Chapter 7 to obtain a determination whether or not this ought to be permitted. In Chapter 13, if the debt is determined to be part of the property settlement, it will be treated just like any other unsecured debt, and the court will not force the debtor to pay it or hold it to be non-dischargeable. If this issue is present, legal counsel should be sought to weigh the advantages and disadvantages of Chapter 7 versus Chapter 13, including how the divorce-related debt issue would factor in.