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