Advantages and Disadvantages

Below are some things to consider when deciding whether filing Chapter 7 or Chapter 13 will work best in your particular situation.

 

Should you file for chapter 7?

Advantages:

  • Eliminates (by discharge) liability on all unsecured dischargeable debt.
  • Provides immediate fresh start.
  • Future income that is attributable to the post bankruptcy services of the debtor, e.g., wages, is the debtor’s property. Future earnings do not go to pay pre-bankruptcy creditors (other than on secured claims if the debtor elects to retain the collateral).
  •  No repayment plan to propose.
  •  No debt limits.
  •  Usually lower attorney fees than for a Chapter 13 and considerably less fees than for a Chapter 11.
  •  A corporate Chapter 7 with assets will pay IRS or USTC unpaid tax “trust fund” withholdings assessments prior to non-tax claims, increasing the likelihood of reducing the amount of the equivalent ‘100% penalty’ claims that may be asserted against corporate officers.

Disadvantages:

  • The Chapter 7 trustee may sell assets (including any lease or the debtor’s business) having more than nominal value over and above any liens and exemptions.
  • No discharge from recent income tax liability, or income tax liability where returns have not been filed or were filed recently or where fraud is involved in the return.
  •  If a creditor files an appropriate action, a debt may be excepted from discharge if it arises from certain types of fraud or willful and malicious injuries caused by the debtor.
  • The automatic stay will be lifted in favor of a secured party or landlord as to property or a leasehold if it is of no value or of nominal value over and above liens and exemptions.
  • No discharge for a partnership or corporation.
Should you consider filing for chapter 13?

Advantages:

  • Only the debtor can propose a Chapter 13 Plan. It is effective when confirmed by the court.
  • Upon completion of the Plan, the debtor is discharged from most types of debt including income tax liability and debts arising from fraud or willful and malicious injury. Recent priority, unsecured income taxes must be paid in full under the Plan but usually without interest.
  • Except as requested by the debtor, all debts are paid only from the debtor’s income, not from the sale of any assets.
  • Any foreclosure process or enforcement of a lien on real property is generally halted, at least pending Plan confirmation. (see below)
  • The debtor can hold on to real property subject to a long term note and deed of trust if the debtor continues to make consistent monthly Plan payments and the Plan provides for full payment of any default under the note within 3 years, and continued payment of the current regular monthly mortgage installments as they become due under the note.
  • Any pending repossession, sale, or lease termination resulting from amounts due and owing on a debt or a lease, secured by or pertaining to personal property, is generally halted pending Plan confirmation. (see below).
  • The debtor can retain a lease of real or personal property if the Plan is complied with and provides for the lease to be ‘assumed’ and for full payment, within a few months, of any pre-petition payment default and continued payment of current rental payments.
  • The debtor can keep personal property that secures a loan, or any real property subject to a short term note and deed of trust, irrespective of a default, or any real property subject to an involuntary lien (e.g. an income tax or judicial lien), if the debtor complies with the Plan and the Plan provides for payment of the entire balance of such obligation or of the value of the property securing the debt, whichever is less with interest at a rate generally less (at least in my view) than the contract rate.
  • The debtor can also hold on to real property, that is not the debtor’s residence and that is subject to a long-term note and deed of trust, under the circumstances described in either paragraph 5 or 9.
  • A Chapter 13 can be dismissed or converted to a Chapter 7 by the debtor at any time.

 

Disadvantages:

  • Only an individual can file (i.e. – not a corporation or a partnership).
  • The debtor has to pay unsecured claims to the extent he/she has sufficient income to do so for at least a 3-year period.
  • The Plan period cannot go beyond 5 years.
  • There are debt limits.
  • There is a rather short timetable given to file a Plan.
  • May delay credit repair by the time period of the Plan.