Should I File Chapter 7 Or Chapter 13 Bankruptcy?

Should I File Chapter 7 Or Chapter 13 Bankruptcy?In a way, both these programs are very much the same. They use the same basic forms and the same judge may hear both types of cases. Most importantly, they both share the same goal. Once the judge issues a discharge order, the debtors and their families have a fresh financial start.

There are at least two major differences, especially since Congress changed the laws in 2005. Chapter 7 and Chapter 13 always catered to different types of debtors with different needs, and now those differences are even more pronounced.

Type of Debt

Broadly speaking, people with credit cards, medical bills, payday loans and other unsecured debt should consider Chapter 7. Chapter 13 may be a better choice for those who are behind on car loans, home mortgages and other secured debts.

However, many people fall behind on their secured debt payments, for many reasons, and they do not wish to retain the property. For example, a debtor may be $20,000 behind on a home mortgage. Even with a five-year repayment period, many families would be hard-pressed to make a monthly catch-up payment, especially after factoring in trustee fees and other debt retirement.

So, Chapter 7 may be an option for people who are behind on secured debts and plan to surrender the collateral.

Amount of Time

Some people want to quickly emerge from bankruptcy so they may begin rebuilding their credit scores. In many cases, a Chapter 7 may be discharged in as little as four to six months. This consideration may be very important if you plan on buying something large, such as a car or house, within the next five years. But since every situation is different, make sure you discuss your goals with your attorney.

On the other hand, some people need additional protection from the Bankruptcy Court. A creditor may be garnishing wages for a non-dischargeable debt, such as student loans, certain income taxes or delinquent domestic support obligations. Both chapters stop wage garnishment until the court issues a discharge order or unless the creditor obtains special permission from the judge. In a Chapter 7, the order typically comes within a few months. However, a Chapter 13 will not be discharged for at least three years, and quite possibly longer than that.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.

Lessons From The Bench

Lessons From The BenchA recent opinion from Judge Michael Kaplan offers valuable insight into a pair of issues that haunt many Chapter 13 debtors.

Funding a Chapter 13 Plan

In Re Andolino began when Christopher Andolino filed Chapter 7 Bankruptcy in April 2013. About a month later, he converted to a Chapter 13. Although the record makes no mention of the reason for this switch, it is fair to speculate that Mr. Andolino had some property he wanted to keep – perhaps a house – and he and his attorney though they saw a way for him to keep it.

Mr. Andolino was unemployed, and according to the Bankruptcy Code, the debtor must have “regular income” to fund the repayment plan. Regular income is almost always defined as either employment income or well-established self-employment income. But, at some point, Mr. Andolino’s girlfriend stepped forward and agreed to assume responsibility for the plan payments.

The Trustee objected to this arrangement, and indeed, many courts are skeptical when anyone other than a non-filing spouse agrees to shoulder the plan payment burden. But the Court ruled that the debtor only needed to prove that the contributions would be “stable and regular.” In this case, Mr. Andolino’s girlfriend made a formal, written promise to pay and there was evidence that she had the means to make good on her promise.

Sometimes, the numbers on a Chapter 13 repayment plan initially do not work, but your attorney can look for creative solutions to fill in the gap.

Inherited IRA

In his original petition, Mr. Andolino declared an IRA. He later amended his schedules to state that he had an inherited IRA, which was still exempt. The Trustee objected in light of Clark v. Rameker, the 2014 Supreme Court decision which held that an inherited IRA was not exempt under the Bankruptcy Code.

Judge Kaplan correctly reasoned that the Supreme Court decided Clark based on state law, and the New Jersey statute essentially defers to IRS guidelines on this matter. So, under New Jersey law, an inherited IRA is still exempt property. Mr. Andolino got to keep every dime of his deceased mother’s $120,000 IRA, and the same ruling may very well apply in your case.

Contact John Hargrave and Associates

We have provided comprehensive counsel to individuals in and around Barrington, New Jersey, since 1977. To schedule a free initial consultation, contact our office by e-mail or call us at 856-547-6500.