The Choice of Chapters in Bankruptcy
Many people find themselves in the unpleasant position of having to file bankruptcy due to financial reasons ranging from poor credit choices, to unforeseen medical bills, to events beyond their control. The question then becomes which chapter in bankruptcy should they file under?
Individuals in the St. Louis area almost always file under chapter 7 (a liquidation bankruptcy, also known as a “fresh start”) or else they file a chapter 13 proceeding (commonly referred to as a “wage earner plan”). It is important to understand the difference between these two chapters.
A chapter 7 bankruptcy is initiated with the filing of a petition. In this petition the debtor (either an individual or a married couple) list all of their property and all of their debt. They pay their attorney and the court costs. They go to court once (usually) and are done. Their debts are mostly or entirely discharged depending upon the facts. They may keep the property they own to the extent that they can exempt it. When we talk about exemptions we mean what the law in Missouri allows a debtor to keep if their property is worth more than they owe. If the property is worth less than what is owed on it, the debtor may typically keep it and pay for it or give it back and not pay for it. If the property has value above what is owed on it then the debtor may keep it free of a claim by the bankruptcy trustee if the amount of equity (value in excess of the money owed) is within what they can exempt. Otherwise, they will lose the property or have to pay money to keep it. It is obviously important to know what your exemptions are and whether you are in danger of losing property in a chapter 7.
A chapter 13 is a proceeding also initiated by a petition. Unlike the chapter 7, the chapter 13 bankruptcy requires a plan. The plan calls for the debtor to pay a sum of money to the chapter 13 bankruptcy trustee for a period of months, generally ranging from 36 months to 60 months, depending upon the facts of the case. The trustee pays the creditors in whole or in part out of these monthly payments.
The attorney fee in a chapter 13 filing is significantly higher than it is in a chapter 7 and more importantly the chapter 13 debtor is paying monthly to the trustee instead of walking out of court and being done with the bankruptcy process as he would be in a chapter 7. So why would anyone want to file a chapter 13 bankruptcy instead of a chapter 7?
Since 2005 the law has imposed what is called a, “means test” in bankruptcy. This test prohibits debtors from filing a chapter 7 if they make too much money. The allowable amount is dependent upon the number of people in the debtor’s family. The larger the family, the more amount of income is allowed before a chapter 7 will be prohibited.
Thus, a chapter 13 proceeding is appropriate for those with too much income. It is also appropriate for those who have too much equity in property they wish to keep and they lack the resources to buy out the trustee. As an example, John and Jean Goodguy need to file bankruptcy. They have a home worth $100,000 and they only owe $50,000. The law gives them a $15,000 exemption in this home (plus perhaps a few other minor league exemptions) but they have way too much equity to keep the home if they file a chapter 7 and they don’t have the money to buy out the trustee. A chapter 13 is needed.
A chapter 13 is good for those who have debts not dischargeable in a chapter 7. This would include debts for taxes, child support, maintenance, debts arising out of a divorce and several other categories of debt. Some of these may be dischargeable in a chapter 13 and the others can at least be managed in an orderly fashion.
A chapter 13 is what is needed if a foreclosure is on the horizon and the debtor wishes to keep the real estate. An arrearage on the mortgage can be addressed in a chapter 13 plan but not in a chapter 7. There are at least several other reasons why a debtor would want a chapter 13 instead of a chapter 7. If none of the relevant reasons apply then a chapter 7 is the way to go given the much smaller cost.
Every case is different and many factors go into a decision to file or not file a particular chapter of bankruptcy. Anyone potentially facing a bankruptcy should seek counsel experienced in that area of the law.
Bernhardt Klippel is an attorney who concentrates his practice in the field of bankruptcy. He may be reached at (314) 862-5300.