Very often I will sit down with a new consult and one of the first things they say is “I want this to be a Chapter 7 bankruptcy, I don’t want Chapter 13.”
I always then ask “Why do you say that?” because the answer gives me insight into what they have already learned (either through reading or talking to someone else, which is often wrong) and what kind of result they are looking for. Very often these same folks end up being excited about the idea of going through a Chapter 13 bankruptcy. Here’s why:
Chapter 13 bankruptcy is a wonderful tool that creates results in certain circumstances that we cannot make happen in Chapter 7 such as: Catching up mortgage arrearages over time and avoiding foreclosure,stripping second and third mortgages from a primary residence, managing nondischargeable IRS or other debt that we cannot get rid of in Chapter 7 (like alimony/child support arrearages or some fraud judgments) and cramming down secured debt on some vehicles (along with the interest rate on the debt). If a debtor has consistent income, but it doesn’t seem to be enough to go everywhere they need it to, then Chapter 13 may very well be the answer.
My typical Chapter 13 client starts out owing more on their home than it is worth with multiple loans, has IRS debt from a business that has failed, has personal guarantees on debt from the business that has failed, and owes as much or more than what their car is worth with an interest rate on the loan of 8% or higher. They have a good income, it’s just not enough to maintain everything and doing nothing results in keeping the house and the car(s) not making sense.
In Chapter 13, the Plan would: keep the first mortgage current and strip the others from the home (so the home would only have the first mortgage and would be current at the end of the Plan), Pay off the IRS over 5 years, discharge the personal guarantees on the business debt, pay off the car at its present value or loan balance (whichever is lower) at 5.25% over the 5 years and likely pay –something- to everyone else, but only after living expenses, secured debt and priority debt have been addressed. At the end of 5 years the client is DEBT-FREE except for the first mortgage, which is current.
Now be honest… Can you get there on your own in five years? Is there any way? If the answer is “No”, then you owe it to yourself and the ones who depend on you to explore the option of Chapter 13.
Lori Patton, Orlando Bankruptcy Attorney