There are exemptions to protect some of your property, but if your possessions are not fully protected in Chapter 7, Chapter 13 can save the day.
Too Much Stuff: One Reason to File a Chapter 13 Case
Bankruptcy is basically only available to those who qualify – have no way to pay off their debt with income or assets. So, most people who file a Chapter 7 bankruptcy case do not lose anything they own because everything they own fits within the available “exemptions”—categories of assets that people filing Chapter 7 are allowed to keep. “Exempt” assets are protected from creditors, and from the Chapter 7 trustee whose role is to liquidate on behalf of the creditors. So in most consumer Chapter 7 cases there’s nothing to liquidate.
Anytime there is a risk of losing something, your attorney should warn you and possibly lead you in another direction. If you do have an asset or a number of assets that aren’t protected in a Chapter 7 case through the available exemptions, and you want or need to keep them, Chapter 13 can be an excellent way to do this.
How to Save Assets in a Chapter 13 Case
You just need to follow one “simple” rule: over the course of your 3-to-5-year Chapter 13 plan, pay to your creditors as much as they would have received had you instead filed a Chapter 7 case. That is, imagine what would have happened if you would have filed under Chapter 7 and forced to liquidate your non-exempt stuff, then arrange to pay at least that much money to your creditors over time in your Chapter 13 plan.
This rule is deceptive because how it is applied in practice is often much better than it sounds. At first blush it doesn’t sound so great—it sounds like you are paying no less to your creditors in a Chapter 13 case, so why is it often so much better?
Illustrating the Benefits with an Example
The quickest way to demonstrate the advantages under Chapter 13 is through a simple example. Assume you have a second vehicle used by your teenage daughter to get to school. It’s worth $4,000, and does not fit within any available exemption (because your primary vehicle uses up your vehicle exemption, let’s say). Under Chapter 7 you would usually have to surrender that $4,000 vehicle to the bankruptcy trustee. But under Chapter 13 you would be able to keep that vehicle by arranging to pay at least $4,000 to your creditors during the 3-to-5-year Chapter 13 case.
Here are the disadvantages in trying to protect your vehicle through Chapter 7, which showcase the advantages under Chapter 13:
1) Although a Chapter 7 trustee would let you to keep that vehicle if you paid him or her $4,000 in a lump sum (to replace what the trustee would have received in liquidating it), you likely don’t have that kind of money available.
2) There’s a good chance that a Chapter 7 trustee would even allow you to pay the $4,000 in monthly installments. But the problem is that you are at the trustee’s mercy about how long you would have to pay it off or under what terms. You may not be able to afford the monthly payments needed to pay it off fast enough. The Chapter 7 trustee’s job is to liquidate—to sell quickly and pay the creditors whatever is available to them. So there is a limit to the trustees’ patience. You’d have much, much more time under Chapter 13.
3) Under Chapter 13 how much you pay each month is based on your ability to pay (although with some limits, depending on your situation). In contrast, the Chapter 7 trustee does not have to give any consideration to your budget.
4) The Chapter 7 trustee also doesn’t need to consider your other urgent financial obligations when telling you how much time you have to pay off the $4,000. But in a Chapter 13 plan, you can usually pay that $4,000 gradually and only after taking care of other more urgent obligations—like a mortgage, vehicle or child support arrearage, for example.
5) If you make payment arrangements with a Chapter 7 trustee but your circumstances change so that you can’t make the payments, you may lose the vehicle after all. Even worse, you potentially jeopardize the main purpose of your bankruptcy, the “discharge” (legal write-off) of any and all of your debts. Although in a Chapter 13 case you also have to complete your plan payments before getting a “discharge” of whatever you don’t pay, there’s much more flexibility. A Chapter 13 plan can usually be amended in response to changes to your income and expenses.
6) A final great benefit in certain cases is that you would actually not be paying anything more to your creditors in a Chapter 13 case than you would have without that vehicle being in the picture, but still get to keep the $4,000 vehicle. You may be doing Chapter 13 for some other unrelated reason—to cure a mortgage arrearage or reduce the vehicle loan payment amount through “cramdown,” for example. Then you may well already be obligated to pay $4,000 or more to your creditors simply based on your ability to pay that much during the period of time you are required to be in the case. Or if in your Chapter 13 case you are paying one or more “priority” debts like recent income taxes or back child/spousal support totaling at least $4,000, then often you would not need to pay anything to the rest of your regular unsecured creditors. Since in this situation in a Chapter 7 case the regular unsecured creditors would have received nothing (since the proceeds from the vehicle liquidation would have all gone to the “priority” debts), you get the benefit of keeping your vehicle without paying anything more than you would have otherwise done so in the Chapter 13 case.