What differentiates Chapter 13 from Chapter 7 the most?
The plan payment does. In Chapter 7, there is no payment. There is a trustee but the trustee’s job in a Chapter 7 is defined in non-exempt assets. So, the Chapter 7 trustee is looking for the things that you can own and he can sell, then turn in the money and pay the creditors with it. The Chapter 13 trustee is not going to sell anything. The Chapter 13 trustee is going to collect the monthly payments from you and then, use that money to pay your creditors. Interesting tidbit as well if you do have non-exempt assets that you would lose in a chapter 7, you can file a Chapter 13. As long as you pay your unsecured creditors at least as much as they would have received in a hypothetical Chapter 7, you can keep those non-exempt assets and pay your creditors back over the time. And it’s more rare, in my practice, but that is another reason why somebody would choose a Chapter 13 over a Chapter 7 if they have a non-exempt asset that they want to achieve.
We save people a lot of money by including their cars in the bankruptcy plan, not only from interest rate savings but from the low monthly plan payments, which are lower than what their car payments were. The trustee is going to turn around and distribute the money to the car creditor, but while you’re in the bankruptcy process, the car creditor can’t repossess your car. So, while you are current on those plan payments, you are safe.
So, what if someone simply has a lot of things to pay where car payments are what ended up getting him to that debt?
With car payments, I prefer to include the car debt to be paid in full through the plan. And so, if you’re including the car debt in the plan, then the plan payment becomes your car payment. And in some cases, your plan payment will actually be less than what your car payment was because your interest rate is lower. And also in some cases, they can actually stretch out your debt to 5 years. Let’s say you only owe 3 years on a car but your car payment is high, say it’s $700 a month for the next three years. Then if you file a bankruptcy and you propose a 5-year plan, you might stretch your filed car payment over 5-years, Your plan payment is then going to be lower than what your original car payment was. It gets complicated to implement, so you will definitely need help on this.
It’s important to know what debt is priority and what debt is non-priority. It’s also important to know whether or not you filed your returns. A lot of our clients, especially the business owners, have un-filed returns and sometimes, they don’t even know about it. I had a gentleman the other day that had un-filed returns for 2011, and he didn’t even know. And he said “No. I filed my tax return for 2011” and he said “No, I couldn’t do the IRS.’ He called his tax guy; his tax guy forgot to mail it in. So, they were trying to correct some — a debt that they claimed he owed for 2011 that he didn’t owe once he filed the return. So, sometimes, you may be in trouble with the IRS and not even know about it because your tax preparer hasn’t done what they’re supposed to do.