A matter I commonly discuss with my clients is why someone would want to file a chapter 13 versus a chapter 7 as payments to the court are required in a chapter 13. While there’s no clear cut answer as every situation is different, there are several characteristics of a chapter 13 that make it a much better fit than a chapter 7 bankruptcy for some people. At Peace Law, we strive hard to be sure that we understand and meet our client’s unique goals in every situation.
First of all, payments to secured creditors for collateral you wish to keep are still made directly to the creditors in a chapter 7, almost always at the previous contractual rate and for the full amount owed to the creditor. When someone has a car loan at a very high interest rate in a chapter 7, this loan is just as bad of a deal as it was before bankruptcy was filed. While a monthly payment to the court is required in a chapter 13, many times the majority of the funds go to pay these secured debts before any unsecured debts are paid. Furthermore, the interest rate is adjusted (we many times modify interest rates in the 20-30% range down to the 5% range), and, in some circumstances, we can pay only what the vehicle is worth, not what is owed. You therefore spend much less on the collateral in a chapter 13 than in a chapter 7 in these circumstances.
Another major reason some clients choose to file under chapter 13 is that one is allowed to make up past due payments on a car or home over the entire length of the plan, which is between 36 and 60 months. When the goal is to save a home from foreclosure or stop a repossession on loans that are delinquent, chapter 13 is sometimes the best and most effective way to accomplish this goal. Also, some other types of debt can take priority in a chapter 13, such as non-dischargeable taxes or past due domestic support obligations, and the chapter 13 plan can pay off these liabilities based on the budget we prepare, not in a garnishment or on the creditor’s terms.
Every situation is different, so we encourage anyone in these financial situations to call Peace Law to set up a free, confidential consultation. Discuss with an attorney your goals and your options to deal with your unique financial situation.
