Chapter 7 vs. Chapter 13 Bankruptcy

When I talk to a potential client either by phone or in person, my goal as a Tacoma bankruptcy attorney is to provide detailed information to make an informed decision about filing for bankruptcy. In order to provide solid information for a potential client to make an informed decision, I need to ask many questions.

The first question I am assessing is whether the individual actually needs to file for bankruptcy. Do they have sufficient “dischargeable” debt that a bankruptcy is going to be a benefit? By dischargeable, I mean that once the person finishes the bankruptcy case they are no longer legally responsible for such debt. Credit card debt, personal loans, medical debt, old utility bills, and other consumer loans are generally dischargeable. Student loans and recent tax debt is not dischargeable (student loans may be discharged through a lawsuit with a showing of undue hardship which is a difficult threshold to satisfy to the court). The answer to whether someone should file a bankruptcy depends upon the circumstances, including the amount of income, the household size, and the amount of debt including debt that can be discharged. Just because someone calls my office does not mean that I necessarily recommend that they file a bankruptcy. I have had many consultations, in person or over the phone, in which I have told the individual that they should not or do not need to file a bankruptcy case.

Assuming that the person needs to file a bankruptcy, the next question I will ask is whether they should file a chapter 7 or chapter 13 bankruptcy case. A chapter 7 case generally lasts 3-4 months and does not include a payment plan. The reason to file a chapter 7 case is to obtain an Order of Discharge from the bankruptcy court. As a general rule, I am going to recommend a chapter 7 bankruptcy filing unless there is a specific reason to file a chapter 13 case, either because you do not qualify for a chapter 7 or because a chapter 13 is better suited to the facts of your case. A chapter 13 case is a “wage earner” plan that generally lasts between 3-5 years. The specifics of the chapter 13 case can vary greatly from cases to case and the answer is based upon the particular circumstances, including the amount of the monthly plan payment, the amount or percentage of the unsecured debt that needs to be paid prior to completion and other issues. I have chapter 13 cases in which the client (known as a “debtor” by the bankruptcy court) pays essentially none of the debt and then receives a discharge at the end of the case, others in which the client is required to pay all of the unsecured debt (known as a 100% plan) and many others that fall in between those extremes. Again, as with seemingly everything else in bankruptcy cases, it depends upon the circumstances, so it is vital that you consult a Tacoma bankruptcy lawyer to help you proceed correctly.

Here are some reasons that someone would file a chapter 13 instead of a chapter 7 case:

1. They previously filed a chapter 7 case between 4-8 years ago and received a discharge in which case they do not qualify for a chapter 7 but can file a chapter 13 case and obtain a discharge;
2. Their income based upon the household size is too high to qualify for a chapter 7 case either by the six month “means test” calculation (see the page regarding “means test”) or based upon the totality of the circumstances (I can make a determination of qualification by reviewing pay statements and any other sources of income for the past seven months);
3. They have fallen behind on mortgage payments, want to keep their real property and so they seek a plan to catch up on the mortgage (known as a “home-saver” case);
4. They have traffic tickets that have suspended their driver’s license and need a chapter 13 plan to lift the license suspension after the bankruptcy filing (driving infractions are not dischargeable in chapter 7 cases but are dischargeable in chapter 13 cases with the exception of criminal driving infractions);
5. They have assets which would are considered “non-exempt” (in other words not protected by either federal or WA state bankruptcy statutes covering exemptions) which would be liquidated by a chapter 7 trustee but which instead can be protected in a chapter 13 case so long as the debtor pays what is known as the “liquidation value” of the debtor’s property;
6. The vehicles can be “crammed down” to pay just the value that a car dealership can sell the vehicle in its current condition if purchased at least 910 days ago instead of the total loan balance (the interest rate can also be lowered and car loan balances can be lowered if they include a negative trade-in amount);
7. Less money for attorney fees is required up-front to file a chapter 13 case since most of the fees are paid as part of the chapter 13 plan; and
8. Priority tax debt (taxes from the past three years) will be paid in a chapter 13 case so such tax issues can be resolved as part of a chapter 13 plan.

The determination of whether to file a chapter 7 or chapter 13 is critical to your case, and the decision can only be made after a careful review and analysis of the complete financial picture. I highly recommend that you contact an experienced Tacoma bankruptcy attorney like myself to discuss these issues. I perform this review and analysis as part of a free initial consultation.