Kentucky Bankruptcy Law

Counsel with Care

Another reason to consider a Chapter 13 instead of a Chapter 7

Let me just be clear that I want people who must file bankruptcy to find their way into the best fitting chapter; I do not have a clear preference between a Chapter 13 and a Chapter 7. If I had to pick one that I tend to lean towards, it would be a Chapter 13 because they are a little more complicated and I enjoy that. While they are more work and thus more expensive, they can also be more affordable for many debtors because the fees can often be paid post-petition (See this post on C 13 plans for more of an explanation). However, I also really like that Chapter 7 bankruptcies are focused on a narrow timeframe and get folks a great fresh start relatively quickly.

I recently met with a great couple whose situation illustrated yet another reason for looking at a Chapter 13. This was an older couple and the wife had some significant health issues that were hopefully in the past, but which raised concerns about how much longer she might be walking with us on the earth. This person was understanbably concerned about how her husband would fair financially with his passing. Both hoped to keep the house which was neither in default nor had equity in excess of their exemptions. The couple’s income was such that filing a Chapter 7 would be no problem and they would most likely be able to reaffirm on the house and keep it. However, a reaffirmation would mean keeping their personal obligation on the house.

If one keeps their personal obligation on a home loan through a Chapter 7 and then falls on harder times, they could be stuck with the deficiency debt even after their house is foreclosed on. This is because once you receive a discharge in a Chapter 7, you cannot obtain a discharge through a 13 unless you wait four years to file or eight years to get a discharge in another Chapter 7 (see this post for a little more detail on this subject). So, if they reaffirm on that debt in a Chapter 7 and either of the couple passed on before four years had passed, the surviving spouse could really be in a bind on the deficiency debt because the fixed income would not be enought to keep the house current.

So, the options were doing the Chapter 7 and hoping the lendor on the home loan would just let them keep paying and remain in the house or filing a Chapter 13. Well, the first option is a bit like rolling the dice and it is hard to gamble at on such things at that stage of life with a fixed income, so the Chapter 13 presented the best alternative. The rational for this is that if they get into the Chapter 13 and circumstances change, they can convert to a Chapter 7. In other words, a Chapter 13 gave them a second layer of protection or a safety net that would not be there in a Chapter 7.

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November 1, 2010 - Posted by | Bankruptcy, Chapter 13, Chapter 7, Plan | , , , , , , ,

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