Should You File Chapter 7 or Chapter 13? Which One is Best?
This is a question I often hear, and my answer is always the same: It depends on which one will provide you with the best overall results for your situation!
Sometimes, when I meet with potential clients, they want to file a bankruptcy right away. Though that’s not a problem, filing for bankruptcy is a big decision!
There are significant differences between Chapter 7 and Chapter 13 that can have long term affects after the case is over, so I always tell my clients to take a deep breath and look at why you want to file right away. Is it because something is about to happen, like your house is about to be foreclosed or the IRS is about to garnish your wages? Or, is it because you just made up your mind you want to do something and you want that “something” to start right away?
It’s important to sit down with an attorney who can explain what the key differences are between Chapter 7 and Chapter 13 bankruptcy and how each one can best meet your needs and goals. You can then work with the attorney to determine what the most realistic option is for you.
Here are some of the main differences between Chapter 7 and Chapter 13 bankruptcy:
Chapter 7: Shorter process, lower attorney fees, and no monthly payments to a trustee
My general feeling is that if you can qualify for a Chapter 7, then you should file a Chapter 7. Why? It’s a shorter process that lasts only about 4 months from the time you file until you get your discharge (that time at which your debts are cleared). A Chapter 13 filing can require 3 to 5 years of monthly payments to a trustee before you are entitled to a discharge.
A Chapter 7 also costs, on average, half the attorney fees of a Chapter 13. You may pay less in up-front attorney fees and costs before you file a Chapter 13 bankruptcy case, but you are paying, in many cases, double the attorney fees over the life of the case.
You have to pay your attorney fees when you file for Chapter 7 bankruptcy, which can make it difficult to file for some. However, the reason you pay for a Chapter 7 before you file and you can pay for a Chapter 13 after you file is this: A Chapter 7 is a straightforward liquidation with no payment plan, whereas a Chapter 13 requires a payment plan, which allows you to include payments for attorney fees in the plan.
Many of my clients can wait and save up the funds to file a Chapter 7, and in the long run, they often pay a lot less and are out of the bankruptcy process much sooner. As a result, they can rebuild their lives more quickly.
Chapter 13: Plan to bring mortgage payments current, modify a car loan, and pay-out ‘priority’ debts
A Chapter 13 bankruptcy filing results in a debt-repayment plan. Therefore, you are “in bankruptcy” the length of that payment plan, which is usually 3 to 5 years. Because there is a payment plan, you may be able to do things like:
- Bring your mortgage loan current over a period of up to 60 months
- Stretch out, reduce the interest or, in some cases, reduce the overall amount owed on a car loan
- Stretch out priority tax payments and child support or alimony arrears over the course of your payment plan
- “Strip” off a second mortgage loan (by treating it as a general unsecured debt)
A Chapter 13 bankruptcy does not modify your mortgage loan. You will be making your regular monthly payments, plus the amount that is necessary to bring your mortgage current over the length of your plan (plus the amount needed to pay attorney fees, the trustee commission, and other payments required under the plan).
In some cases, if you can show there is not one cent of value in your home above the amount owed on a first mortgage, you can “strip” off a second mortgage and treat it the same way other general unsecured debts are treated in your case. Of course, you have to complete your entire repayment plan to get this benefit.
A Chapter 13 bankruptcy is a good option for people who are trying to save their home and who can afford the required monthly bankruptcy plan payments, deal with priority tax debts and other priority debts, and deal with a car loan that is otherwise too expensive due to high interest rates. Sometimes a client will file a Chapter 13 just for the benefit of reducing interest and stretching out a car loan – adjusting their monthly cash-flow to better handle their other ongoing expenses.
North Carolina Bankruptcy Lawyers
If you are in over your head in debt and are looking for a way out, the Law Offices of James Scott Farrin may be able to help. Call 1-800-220-7321 to set up a free and confidential consultation with a North Carolina Board Certified Specialist in Business and Consumer Bankruptcy Law.