Chapter 13 Bankruptcy
by Kurt A. Steinke, O'Reilly Rancilio P.C.
There are a number of reasons why an individual may elect to file a Chapter 13 bankruptcy instead of a Chapter 7. Chapter 13 involves reorganization of debt through the filing of a Plan which categorizes debts and pays them over time. Chapter 7 involves payment of debt from the liquidation of non-exempt property. Ultimately, the goal in each instance is to obtain a discharge of debt. The risks and benefits of each are dramatically different.
While Chapter 7 is usually the fastest way to eliminate debt, Chapter 13 may allow one to discharge certain types of debt that can’t be discharged in a Chapter 7. Specifically, a debt that has been incurred by fraudulent means can be excluded from the discharge in a Chapter 7, but can normally be discharged in Chapter 13 if all other requirements are met.
Chapter 13 can also be used to protect equity in property that might be liquidated by the Trustee in a Chapter 7. If one has the regular income to make payments to creditors, after meeting monthly living expenses, a Chapter 13 allows payment to creditors over time instead of payment from proceeds of a forced sale of assets. The creditors must receive at least as much as they would from a liquidation of non-exempt property by a Chapter 7 Trustee.
One may have to file under Chapter 13 if their income exceeds their monthly living expenses by enough to allow for a meaningful repayment of the debts. There is no fixed rule that dictates how much income is too much, but one of the duties of Chapter 7 Trustees is to look at each case they are assigned and refer questionable ones to the U.S. Trustee’s office for a determination based on all the facts of that particular case. If the U.S. Trustee’s office determines that there is an ability to repay a meaningful amount of the debt over time, they will seek dismissal of the Chapter 7 proceeding.
Which type of bankruptcy petition should be filed in a particular situation is a question that should only be answered by a qualified professional that has been provided with complete and accurate financial information.