Chapter 13 costs much more than Chapter 7, takes about 10 times as long, so you do a Chapter 7 if possible, right?
No. These two options each have advantages and disadvantages that need to be carefully matched to your immediate and long-term goals. The greater cost of Chapter 13 sometimes is far outweighed by what you may save through that procedure—possibly even by tens of thousands of dollars. The length of Chapter 13 can itself be an advantage when you’re trying to buy time or stretch payments out over a longer period to lower their monthly amount. But in other situations, Chapter 7 may be just what you need.
It’s good to inform yourself in advance about these options. But it’s also wise to have an open mind when you first go to see an attorney for legal advice. You may simply not know about a crucial advantage or disadvantage that could swing your decision one way or the other. And you don’t want to be too emotionally invested in going in one direction when the other may be a better choice.
Sometimes your circumstances and/or your goals push your decision strongly in one direction or the other. Sometimes you may even only qualify for one, and that one provides what you need. Or you may qualify for both, but still everything points towards either Chapter 7 or 13. In either situation, it could be a very easy choice.
But often you could go through either a Chapter 7 or Chapter 13 case AND BOTH may have attractive features. So it can come down to a deeply personal choice.
A couple simple examples will make this clearer.
If you are behind on your home mortgage and want to hang onto the home, a Chapter 7 case would likely write off all or most of your other debts. Then you’d likely have a few months to catch up on the mortgage. In contrast, a Chapter 13 case would give you up to 5 years to catch up. And it may allow you to avoid paying a second mortgage. This choice turns to some degree on factual issue like whether you have a second mortgage that could be “avoided,” and how much you’re behind on the mortgage payments. But on a personal level it comes down on how important it is to you to keep the house, and so much you’d be willing to bet that you’d be able to do that though Chapter 7 by negotiating a relatively quick catch-up of payments instead of getting much more time and far greater protection through Chapter 13.
Similarly, if you owed some recent income taxes that would not be written off under either Chapter, you could file a Chapter 7 case and write off all or most of your other debts for that you could focus your financial resources on the IRS. You’d arrange with the IRS to make monthly payments to pay off that tax debt, plus ongoing interest and penalties, under its repayment terms, while under potential collection activity by the IRS. Or you could file a Chapter 13 case and pay those taxes through a formal plan based on your own budget, usually avoiding additional interest and penalties, all the while being protected from the IRS. But you would pay extra fees for these advantages. This choice also depends on the facts, such as how much tax you owe and how much you would be able afford to pay each month once your Chapter 7 case were completed. But then it comes down to the more personal question of how confident you’d be that your present income and expenses would stay stable throughout the repayment period, so that you could make those payments no matter what.
To be honest, it is not unusual for people to have some factors pointing towards Chapter 7 with others pointing towards Chapter 13. But instead of wringing your hands about having tough choices, realize this is usually a good thing to have more than one choice, even if neither is perfect. An experienced, conscientious attorney will walk you through this, help you prioritize your goals, weigh any risks, and give you what you need so that you can confidently make a smart choice.
Because being informed is a good thing, and because this decision between Chapter 7 and Chapter 13 is so important, the next few blogs will look at both the basic and some more subtle differences between them.