So what are some items of misinformation that you have to dispel from time to time with the people that have concerns with credit issues? Some people, for example may believe that they will not be able to buy a house again, or something along those lines. What would I tell that individual?
Well, frankly, it all depends at what stage that individual is. If an individual is losing his or her home to foreclosure, they don’t need to worry about buying a home; they need to worry about saving the home they have. One of the downsides to Chapter 13 is that you will be in the bankruptcy for 5 years. And while you are in the bankruptcy, your credit is frozen. You cannot borrow money, and to some people, that is a relief. Some people look at and they say “that’s how I got into this mess in the first place–borrowing money.”
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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.