Different Financial Implications of Chapter 13 & Chapter 7

Interviewer: What sort of person would prefer Chapter 13 to Chapter 7? What sort of financial standing should they have at the current time?

Court Koehler: Yeah, it’s generally people who are a little bit better off than Chapter 7 debtors. That’s because they’ll have assets that they want to keep. If you’re just renting a house, for instance, there’s no real reason for you to go into a Chapter 13 to save it because you can keep renting your house if you actually go through Chapter 7, so there’s no need for that.

What Chapter 13 covers is people who are afraid they’re going to lose some sort of assets, like a house, or it might even be bigger assets, like boats and cars and things like that that are more extravagant. It’s generally people that are employed but maybe have become underemployed or downgraded somehow in their income. They have kind of behind on their regular payments and they just need a little bit of help to kind of get them back to zero so they can go on from there. It’s people that own houses and have jobs, usually.

Interviewer: What about individuals that are only receiving a retirement benefit? Could they utilize it as well to make their payments?

Court Koehler: Yes. Yeah, they can. It’s the same kind of a situation.

Client Homeownership

Interviewer: For the clients that you work with, how long have they been homeowners? Is it something they’ve been less than a decade or are we talking about homeowners who have had their house for 20 years or something?

Court Koehler: It could be either way, but they’re more likely to have some equity in their house. If you don’t have any equity in your house or if you have very little equity in your house, then you may be able to save your house under Chapter 7, if the homestead exemption covers it. That gets a little complicated and obviously that’s one of the reasons you need to talk to an attorney before you decide which one you want to file.

Usually, to make a long story short, the more equity you have in your house, the more likely that you’re going to need to go into a Chapter 13 as opposed to a Chapter 7. That would tend to say that it’s people that own and pay mortgage for a few years, at least.

Secured v. Unsecured Debts & Chapter 13 Protections

Interviewer: How does Chapter 13 protect someone? If I got Chapter 13, can I still be sued or can my wages still be garnished while the plan is in effect, for whatever reason?

Court Koehler: No. There is protection from debt collection suits and even other kinds of lawsuits, like personal injury suits and things like that. The protection between Chapter 7 and Chapter 13 is really the same. The difference is that in Chapter 7 you’re liquidating all of your assets, and in Chapter 13 you’re not. You’re keeping all of your stuff, but you’re going to enter a payment plan.

The easiest way to explain it is you take everything you’re behind on and you split it into two categories. You split it into unsecured debt and secured debt. Just to quickly explain, secured debt is something that’s backed by an asset or a property, like your house is a secured debt. It’s backed by your mortgage. If you don’t pay your mortgage, they can come and take the house to pay off the mortgage bill. Your secured assets, like your car and your house, are in one category, and your unsecured assets – things like medical bills and credit cards and loans and things like that – are in another category.

You take all of the back payments from your secured debt. You can divide that up over the period of the plan. Over a three-year period or a five-year period, you pay that secured part back. Then, depending on your situation, it gets a bit complicated, but you may have to pay a little bit back to the secured creditors as well. A lot of times you won’t have to pay anything back to the unsecured creditors. You’ll kind of split that amount up over the period of the plan and then that is your Chapter 13 payment. You pay it, and then at the end you get your discharge.

In Chapter 7, you get the same protection from lawsuits and garnishments and things like that, but everything happens all at once instead of being pushed out over a five-year plan or a three-year plan.

Interviewer: Can Chapter 13 bankruptcy protect you from foreclosure on your home when you upload your end of the payment plan?

Court Koehler: Yes. That is probably the greatest benefit that it offers: we’ll stop the foreclosure immediately in its tracks. It will allow you to cure the default from the mortgage and a length over the plan period so that you can afford it and get back on track.

Interviewer: How does this work for other sorts of assets, like a car?

Court Koehler: Yeah, it’s really the same for cars. They’re secured debts, just like a house is. If you’re behind on a car payment and you want to save your car – you don’t want to lose your car and you don’t want it to be repossessed – you could enter a Chapter 13 payment plan and you could save your car, just like you can your house. The reason that it’s less common is just because a lot of the time it’s not necessarily worth it to go and repay everything just to save a car. A lot of times you can just file Chapter 7, give the car back, and get a new car. A lot of times, that’s a better situation.

To be honest with you, a lot of times really the more rational thing for people that are in foreclosure to do is to go ahead and just give the house back, move out, and find a new house or a new living situation, but people get really emotionally attached to their houses. Some people’s cars are really important to them but a house is a home and it’s so much more than just an asset. A lot of times people are just dead-set on saving that asset because that’s what they care about, so that’s what Chapter 13 will allow you to do. The short answer is, yes, you can save a car in Chapter 13 just in the same way. It just isn’t as common, for practicality reasons.

By Court Koehler

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