Chapter 13’s are small consumer reorganizations, whereas Chapter 7’s are straight bankruptcy liquidations. Even though filing bankruptcy through Chapter 13 or Chapter 7 results in wiping out basically the same kinds of debts, and even though Chapter 7’s are less expensive (and much shorter), neither of these factors keep Chapter 13’s from being the most common kind of bankruptcy in our area of the country. They are filed about twice as often in Eastern District of Texas, and three times as often in the Western District of Louisiana. Here are my top 5 reasons why (starting with number 5).
5. Lower Payments on Vehicles and Appliances
There are basically only three ways to lower your payments: decrease the balance you owe, drop down your interest, and spread out the term over which you have to pay off a debt. That’s it. And, strangely enough, Chapter 13 can often do all three of these. But even if your Chapter 13 can accomplish only one or two of the above, the difference resulting in your budget often single-handedly makes Chapter 13 a compelling option for financially distressed folks.
4. Attorney’s Fees Spread Over a Longer Time Period
One of the most common questions I get is, “How can I pay attorney’s fees if I’m bankrupt?” That’s a very good question, and fortunately, there are some good answers. Chapter 13, for example, allows a debtor in our office to pay about $150 in attorney’s fees down, with the balance of fees spread out (and combined in with their monthly payment) without any interest over a long period of months or even years.
3. Everyone Qualifies
Unless your debt exceeds huge limits (secured debts that approach a million or unsecured debts that approach $350K), then a Chapter 13 will allow reorganization for individuals or couples, regardless of their income levels. And even though people who make a lot of money may have to pay back all their debts back in a Chapter 13, the important fact is that they actually qualify. For example, many people are fully willing and able to pay back all their debts, but have simply gotten into a bind where they fear losing their equity in their home, vehicles, etc. Often these folks have no problem with paying everyone back. They just need to lower the interest rate that has snowballed on them, or they just need to spread out the debt over time.
2. Stop Foreclosures and Repossession
Chapter 13 is the primary means of stopping a foreclosure or a repossession, without question. Chapter 7 can only stop it for maybe 4 months, whereas a Chapter 13 reorganizes your rights with your home or auto lender on a much larger scale—giving you 3 to 5 years to completely fix the issues. Chapter 13 was built by congress for the purpose of allowing folks to reorganize the way they pay back vehicle loans and home loans, while not having to move away or lose their job due to lack of transportation.
1. Keep Non-Exempt Assets
Alright, this may not seem like a biggie at first, but in my opinion, it is the single best attribute of a Chapter 13, especially if you live on the east side of the Sabine River! Texas exemptions are broad (they cover just about everything) and deep (often unlimited values, such as the homestead and annuity exemptions).
However, even Texans sometimes have an ATV, or a boat, or those emergency funds that may have been stashed away that they really don’t want to part with, and yet they’re happy and able to pay the value of these items to their creditors, if given the time to do so. A Chapter 13 allows you to pay the value of those items over time. In Louisiana, it can be even more of a Godsend, because the exemptions are not very big to begin with. Often a Chapter 13 is necessary for an income earner to keep that work truck that’s paid for, necessary to commute to work. Keeping these personal items is essential for many folks. Since a Chapter 7 may cause these items to be taken and sold by a trustee, a Chapter 13 is attractive because it allows these folks to keep these important items and pay the creditors what the items are worth.
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