When a Chapter 13 Bankruptcy Filing is Appropriate

In general, a chapter 7 bankruptcy is preferable to a chapter 13. This is because a chapter 7 bankruptcy proceeding will produce a discharge of debt sooner than a chapter 13, and it will usually be less expensive. There are several situations, however, when a chapter 13 is the best option.

First, a debtor may simply be ineligible to file a chapter 7 bankruptcy because he or she has too much monthly income remaining after monthly expenses are paid.

Second, a debtor may be ineligible to file a chapter 7 bankruptcy because fewer than eight years have elapsed since the debtor filed a prior chapter 7 case that resulted in a discharge of debt.

Third, a debtor may have fallen behind in house or vehicle payments and cannot pay the arrearage, but now has the ability to resume making regular payments and wants to retain the house or vehicle. The chapter 13 plan will allow the debtor to pay the arrearage over time.

Fourth, a debtor may own too much "non-exempt" property, and wants to retain such property.

Finally, the debtor may want to take advantage of the lien-avoiding rules only available in chapter 13 proceedings, such as "lien stripping" and "cram downs." "Lien stripping" is when a secured debt is converted into an unsecured debt, and gets treated the same as all of the debtor's other unsecured debt. The most common example of this is a wholly-unsecured junior mortgage. Such a mortgage will get paid partially through a chapter 13 plan, and the unpaid balance will be eliminated along with the unpaid balance of the debtor's other unsecured debt, such as credit cards and medical bills. A "cram down" occurs when a secured loan, having a balance in excess of the value of the collateral securing such loan, is reduced to the value of the collateral. Although the secured portion of the loan will get paid in full, the unsecured portion of the loan (the portion of the loan in excess of the value of the collateral) will be treated the same under the chapter 13 plan as the debtor's other unsecured debt, and will be paid back partially. The most frequent "cram down" target is a car loan.

I like to think of a chapter 7 proceeding as "Plan A", and a chapter 13 proceeding as "Plan B". I will only recommend "Plan B" to a client if one of the above situations is present.

Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com

Playing Favorites Among Creditors

Most people with several creditors, feel more loyalty to one or two of them than the others. These preferred creditors are often a favorite store, but are more frequently a friend or relative who lent them money. Let's face it,...favorite creditors are more likely to get paid when money is tight.

A problem can arise, however, when such a payment is made on the eve of filing for bankruptcy. Under the U.S. Bankruptcy Code, such a payment may be deemed a "preferential payment" by the bankruptcy trustee if it is made within 90 days prior to the filing of the bankruptcy petition. The trustee, exercising its "avoiding powers", can force the creditor to surrender the payment to the trustee. If the creditor happens to be an individual related to the debtor, or an entity owned or controlled by the debtor, the trustee can go back up to one year prior to the filing of the bankruptcy petition to recover such payments.

The trustee's power to avoid preferential payments prevents a creditor from receiving more of the debtor's property than that creditor would receive in a Chapter 7 bankruptcy proceeding. As a result, such power promotes equality among creditors, and deters creditors from racing to get at the debtor's property before the debtor files for bankruptcy.

Playing favorites among creditors in the days leading up to a bankruptcy filing is a horrible idea. There's no other way to say it. Imagine having to go to your friend or family member, who helped you in your time of need, to ask them to return all of the payments you made in the past year, because if they don't, a bankruptcy trustee will take them to court to recover the payments. This can put a damper on your relationship.

The rules in this area are detailed, and their application can be complicated. Anyone contemplating bankruptcy who wants to pay certain creditors over others should discuss it with their bankruptcy attorney prior to making any such payments.

To coin a phrase,...an ounce of prevention can avoid a pound of avoidance.

Matthew S. Rousseau, Esq.
Morrison Rousseau, LLP
www.WorcesterBankruptcyAttorney.com