The Bankruptcy Code provides protections, called “exemptions,” that will allow you to protect almost all of your assets. While the specific protections are too numerous to discuss in detail, suffice it to say that you would not have suspected that each individual debtor can protect over a million dollars in IRAs or 401(k) money, or over $8,000 of household goods such as furniture, appliances and the like. The federal protections are actually very generous for most ordinary wage earners. So, while you can get debt relief, you can also keep your assets in most cases.
You may have heard about changes to the Bankruptcy Code, in 2005. Many sources, including debt collectors, try to paint these changes as restricting relief to bankruptcy, but they really do nothing of the sort. The main changes were designed to try to catch “abusers” of the system (which, in our opinion, were few and far between), but the bottom line is that bankruptcy-related relief from debt will be available to you, one way or the other, if that is what we recommend. (It is really only if you have substantial debt that you would have to consider a Chapter 11 bankruptcy like many corporations file.)
Chapter 13 Advantages
Mortgage or Car Loan Defaults
If you are behind in your mortgage or car loan payments, a Chapter 13 case will allow you to resume regular monthly payments to the creditor and to pay back the past due amounts over a longer period of time than the creditor will normally allow. For example, most creditors will only agree to a very short period of time for you to get “caught up” and will normally require very large payments to do so… for example, a typical “work-out” in these situations allows six months, with virtually none of these work-outs going beyond 12 months. This “solution” only adds additional pressure to your monthly budget because your monthly payments can almost double in some cases. The Chapter 13 option allows for repayments of the past due amounts over a much longer period of time; i.e., anywhere from 36 to 60 months. Further, the past-due amounts due to the mortgage company or car lender get paid back to them without any further penalties, interest or late charges. (During this period of time, they also cannot call or harass you without going through our office and the Bankruptcy Judge, so the pressure of constant phone calls is alleviated throughout the entire process.)
Payment of Tax Debt
You can pay down tax debt, generally, without any further interest or penalty. This can be a substantial advantage. I have had many clients who have entered into Installment Agreements with the IRS, but have really not gotten anywhere with those agreements because the IRS is allowed to add a penalty of 11 percent per year, on top of the interest (which depends on the prime rate). (So, even in years where the prime rate is very, very low, e.g., 3 percent, you are still paying 14% per year on your tax debt. Imagine the cost of money when interest rates are more “normal,” such as 6-8 percent… the actual cost of paying back the IRS will mount to some 17-19 percent per year, basically an unsustainable payment in most cases, and one you should NOT do in most cases.)
Asset Mix and Income
You may not have a choice in selecting whether a Chapter 7 or Chapter 13 bankruptcy applies if you are a substantial wage earner. The 2005 changes to the Bankruptcy Code require our office to review your financial information (income and expenses) under a rather complicated “Means Test.” Suffice it to say that the preparation, review and analysis of this “test” are not to be tried by someone not familiar with bankruptcy law. A very basic review can be found on the web site of the Office of the United States Trustee. Please note that the opinions and statements in that Web site are those of the government and we may or may not agree with their interpretations of the new law.
Another reason why you might not be able to choice which Chapter to file bankruptcy under is when your assets have substantial value in excess of the debt against those assets. Because of the complexity of these calculations, it is impossible to explain on this page. Briefly, however, it is still possible to keep assets even though they have substantial value in Chapter 13 cases.
Most of my clients who have had reasonably good credit scores prior to falling into financial difficulty have been able to regain their credit scores fairly quickly even while actively involved in a Chapter 13 case, achieving scores of 650-670 within 18-24 months. They also are able to get financing for vehicles or even refinanced mortgages.