As a Bankruptcy Attorney in Maple Grove, I hear it all the time- I want to file a Chapter 7 Bankruptcy, not anything else. Chapter 7 Bankruptcy, referred to as a “liquidation bankruptcy” or a “fresh start bankruptcy” is a four-month process where at the end of the process most unsecured debt is discharged, wiped out, tax free! Of course, there are many clients who do fit squarely within the parameters of a chapter 7.
Often, the client has heard of someone else who has filed a Chapter 7 Bankruptcy and has started over quickly and the client wants to replicate the result their buddy got. Only if life were this simple. Not every person’s life and circumstances are the same. I have yet to meet a single client who has the identical situation that another client has. Comparing your financial circumstances to someone else’s is like comparing apples and oranges. They are just two different fruits.
I would speculate that over 80-90% of our clientele File Chapter 7 Bankruptcies in Maple Grove and the rest file Chapter 13 Bankruptcies. So, what are the advantages of Chapter 13 Bankruptcy? What is a chapter 13 bankruptcy? There is a lot of confusion about what a chapter 13 bankruptcy is and what it can do for you.
A Chapter 13 Bankruptcy is a government-sponsored debt consolidation plan with some extraordinary twists. First, the plan term cannot be shorter than 3 years and cannot be longer than 5 years. Second, contrary to popular belief, most chapter 13 debtors do not have to pay their debts in full. In fact, a super majority do not. You make payments back to a chapter 13 trustee based on your ability to pay. If you can only afford to pay 200.00 a month for 36 months, the remaining unpaid debt gets “discharged” or wiped out, tax free! So, say for example, you only pay $7200.00 toward $50,000.00 in credit card debt, than $42,800.00 unpaid debt gets wiped out, tax free.
But, this begs the questions does it not? Why would a person make payments back at all in a chapter 13 bankruptcy when you could file a chapter 7 and get your life back in 4 months? There are primarily 4 reasons why you should absolutely consider filing a Chapter 13 Bankruptcy vs. a Chapter 7.
REASON 1: INCOMEThe truth is not every person can file a Chapter 7 Bankruptcy. The whole idea and policy behind bankruptcy are if you have the ability to make a payment to your creditors you should. Consider this- a doctor came in to see an attorney friend of mine. This is a true story. The doctor had approximately 60k in credit card debt and the doctor made 130k a year. He had a wife, who was a home engineer, and one child.
My friend listened to the doctor who insisted that he file a Chapter 7 Bankruptcy. He wanted “nothing to do with a Chapter 13 Bankruptcy.” So, my friend gave in, filed him as a Chapter 7 Bankruptcy. Once in the Chapter 7 Bankruptcy, all debtors must attend a first meeting of creditors. Not sure why they call it a first meeting, because there is not a second, and I am not sure why they call it a meeting of creditors because most creditors never show up to these meetings.
I was there that day, the doctor had his meeting of creditors and the questions from the trustee were not friendly. Essentially, it boiled down to, you are making 130k a year and you filed a Chapter 7 Bankruptcy? Who told you- you should file a Chapter 7 Bankruptcy? The client looks and points to my friend- attorneys are always the first people to be chucked under the bus when it turns out a tactical decision the client made was a bad decision- even though they are counseled not to do it. The meeting was ugly. The trustee looked over her glasses and said, “ I am referring this case to the US Trustee’s Office for substantial abuse.”
Later, the US Trustee’s Office brought a motion to dismiss his Chapter 7 Bankruptcy case for substantial abuse, in other words, the doctor had the ability to pay back his creditors and he should. The doctor’s case was later converted to a Chapter 13 Bankruptcy case where he made his plan payments of 600.00 a month and later received a discharge of the balance of his unpaid debt. The moral of the story? If you have the ability to pay back some of your debt, you must do it!
My 14-year-old son and my 13-year-old daughter can understand that. So whenever I get a high wage debtor who absolutely insists on filing a Chapter 7 Bankruptcy, despite my protests not to, and to instead file a Chapter 13, I send that person a kind letter reminding them that we may have to convert them to a Chapter 13 down the road when the Chapter 7 does not work out. To be sure, some cases are worth the gamble- heck for 2k maybe I can see if it will work. Some cases are clearly way too high of income to even consider filing a Chapter 7.
REASON 2: ASSETSIn a Chapter 13 Bankruptcy you lose no assets! A Chapter 13 Trustee does not exercise control over the debtor’s assets in a Chapter 13 like a Chapter 7 trustee does. The best way to illustrate this point is by example.
Say you own a home in Minnesota worth $200,000. We can use the Minnesota homestead exemption to protect your home. But, let’s say you also own a condo in Florida worth $50k. There are no exemptions to protect the Florida condo.
In a Chapter 7 Bankruptcy, the condo (the nonexempt asset) would be physically taken over by the Chapter 7 Trustee whose job it is to liquidate (sell it) and use the proceeds pay your unsecured debts. To the extent your debts don’t get paid off, they get wiped out, tax free, forever!
So, if the debtor in a Chapter 7 Bankruptcy had $100k in credit card debt, debtor would wipe out $50k in credit card debt. This is not a bad result for the debtor- she gets a 50% discount on her debts and the freedom from her remaining debt. But, what if a debtor says hey- I don’t want to lose my condo in Florida- I worked my ass off for that condo and we use it and enjoy it and I don’t want to lose the condo- period!?
This debtor should consider doing a Chapter 13 Bankruptcy where the debtor would not lose the condo. Instead, the debtor would be required to meet the “best interest test.” What the heck is that? In English, debtor must pay her unsecured creditors what they would have been paid in a Chapter 7. In a Chapter 7 Bankruptcy, her creditors would have received $50k. So, that is what her creditors must receive in a Chapter 13 Bankruptcy to meet the “best interest” test.
Leaving out all other fees, debtor would need to pay her creditors about $833.00 a month for 60 months. If debtor does so, debtor doesn’t lose her condo.
REASON 3: ONGOING DEBT CONCERNSLife is humbling. We have seen everyone reason under the sun why someone needs the protection of the bankruptcy code. Sometimes, debtor’s not only worry about their current debt problems, but debt problems that may arise post filing. For example, we have had many people say to us- hey, I have gambling problems, or my business is shaky, or I have no health insurance. What are the advantages of a Chapter 7 Bankruptcy when you know there is a reasonable certainty you will incur more debt you will not be able to repay? I recently met with a 27 year old young man who told me he has cancer and no health insurance. Once I put my heart back in my chest, I explained to him that Chapter 7 was a cure for the debt you have now, but it will not solve the debt he is sure to incur down the road.
If debtor files a Chapter 13 Bankruptcy, they can convert their Chapter 13 case to a Chapter 7 bankruptcy down the road and we can add debt to the Chapter 7 Bankruptcy that was incurred after the Chapter 13 Bankruptcy was filed. So if this young man pays $150.00 a month in a chapter 13, and 2 years into the plan incurs $50k in medical debts, we can convert him to a Chapter 7 and discharge the additional $50k in medical debt.
This young man didn’t make a lot of money but so he didn’t profile like a typical Chapter 13 debtor but his situation was not typical either. At Kain & Scott, we need to know the whole story so we can properly advise the client on what is best for them.
REASON 4: MORTGAGE OR VEHICLE ARREARS
The call comes in.....the client is frantic.....”I have a foreclosure sale on my home on Thursday and I can’t pay the mortgage company what I am behind prior to the sale date, what do I do?”.
Or, the call comes in.........”they repossessed my car, and I need it for work, what do I do?”.
If a Chapter 7 Bankruptcy is filed in either of these instances, relief is somewhat temporary. First, a foreclosure sale can be stopped by filing a Chapter 7 but the Chapter 7 Bankruptcy does nothing to cure the arrears and solve the underlying problem. The Chapter 7 Bankruptcy filing only provides a temporary solution. If a car is already repossessed, once the Chapter 7 is filed, the lender is barred from auctioning the vehicle off but we can’t force the creditor to return the vehicle.
However, in a Chapter 13 Bankruptcy, relief is more than temporary. Not only can filing Chapter 13 Bankruptcy stop a foreclosure sale, the plan provides a way in which the mortgage arrears can be paid back to the lender (interest free) over the life of the plan. So, if we file a bankruptcy for debtor on March 2, 2016, debtor’s mortgage arrears go on the plan through March and the debtor commences regular mortgage payments on April 1.
With a vehicle, if the vehicle is already repossessed, the vehicle must be returned to the debtor and the vehicle arrears, vehicle loan, or both are paid on the plan. Creditors are not always so cooperative in returning vehicles, but there are ways under the code to force compliance.
So, even if a debtor’s income is somewhat modest, the consideration of a Chapter 13 makes sense if the needs of the debtor require it. All too often lawyers and clients are too quick to pronounce the Chapter 13 Bankruptcy option dead. A thorough vetting of the debtor’s circumstances is a must. Only after listening to the debtor’s complete story can the lawyer and debtor begin the process of making a decision on what is the best medicine for the client’s ailment.
Whenever I have a client say Wes, please, save your breath, I want to do a Chapter 7, I at least protest and say let me explain all the options so you can make an informed decision. The client is always so kind and gives me permission to proceed. Many times a client will say...”wow, I did not know that”......or “I am glad you told me this.” At Kain & Scott us Bankruptcy attorneys in Maple Grove, strongly believe in open and honest dialogue between the client and the lawyer.
I have never had a client yet regret taking the extra time to make sure that their story has been told, and that the options available to them have been thoroughly discussed. We have found when this happens, the clients felt informed, and the client has found they have made a better decision on the overall solution to their debt problems.
If your in a financial struggle and interested in knowing your options, download my free, Debt Solutions 101: Debt Consolidation vs. Bankruptcy, eBook. Use it as your guide to choosing the right debt solution for your financial situation.