Using Time to Your Advantage in Chapter 7 and 13

Chapter 7’s big advantage is that it’s quick. Chapter 13’s big advantage is that it buys you more time to do what you want or need to do.

A Key Distinction-Treatment of Time

We’re starting a series of blog posts about the practical differences between Chapter 7 and Chapter 13 bankruptcy. Before getting down into the details let’s look at a difference that affects just about everything else—time. These two options deal with time very differently.

Sometimes getting something done quickly is to your advantage. Sometimes getting more time to get something done is to your advantage. Here’s how these play out with Chapter 7 and 13.

Chapter 7—In and Out Fast

If you’re like most people thinking about bankruptcy, you’ve been hurting financially for a long time. Understandably you want to get a fresh financial start fast.

With any kind of bankruptcy you get relief from almost all creditor collection actions the minute you file your case. Then with Chapter 7 “straight bankruptcy” your debts are discharged less than 4 months from the day you file the case. All or most of your creditors can never again attempt to collect on the debts.

So, you get immediate relief, your creditors are put on hold, and then just a few months later you’re done. You have your fresh start.

Chapter 7—One Point in Time

Chapter 7 bases just about everything on that moment in time when your case is filed. It particularly focuses in on your assets as of that moment. Generally your future assets are not relevant, unless they derive from assets owned as of the date of filing. (Rental income from property you own now would be an exception.)  Future income doesn’t count as present assets, unless it was for work done before filing.

Chapter 7—Short-Lived Automatic Stay

One problem with Chapter 7 is it can be TOO quick, when it comes to protecting you from certain creditors. The “automatic stay” is the name of the protection that kicks in the moment you file a bankruptcy case. That protection lasts only as long as the case is open. In a Chapter 7 case that means only 3-4 months, at the most.

Chapter 7 also gives you no enforceable mechanism for making payments on debts that you want or need to pay. For example, if you’re behind on a mortgage and want to catch up you have to bring it current by whatever terms and timetable the mortgage holder demands. There is nothing in Chapter 7 that compels the mortgage holder to give you more time. It’s the same if you’re behind on a vehicle loan, child or spousal support, or recent income taxes. You have little or no protection, and no power to compel these kinds of creditors to be more flexible.

(Chapter 7 does allow for “reaffirming” secured debts like vehicle loans. But “reaffirmation” doesn’t usually help if you’re behind on payments. It just makes you liable as if you hadn’t filed bankruptcy. And it doesn’t apply to other kinds of not-discharged debts like child/spousal support or income taxes.)

Chapter 13—Stretching Out Time in Your Favor

A quick bankruptcy procedure isn’t always in your favor. So getting in and out of bankruptcy quickly isn’t good if you’re left with ongoing special debts.

That’s not a problem if the surviving debt is one you can readily handle. You may have had trouble keeping up with payments on your vehicle loan. But after discharging all or most of your other debts under chapter 7 you may have no trouble making them. Same thing may be true if you still owe a relatively small amount of nondischarged income tax. You may well be able to pay it off conveniently through a negotiated monthly payment agreement.

Problems occur when the debt that would survive a Chapter 7 case is too large to handle on your own. It’s not at all unusual to have more than one such debt. Then you need the substantial additional time that Chapter 13 “adjustment of debts” gives you.

With Chapter 13 you’re not effectively being left on your own to deal with these special debts as under Chapter 7. Instead Chapter 13 can give you up to 5 years of time and protection. You have up to that much time to bring a debt current or to pay it off.

Chapter 13—Flexible Time

Chapter 13 doesn’t just buy you time to deal with those other problems. It buys you flexible time. It does so in three ways.

First, the amount of time it buys flexibly depends mostly on your budget. If your income qualifies you for a 3-year plan, you’re usually allowed to stretch it out longer. If you just need an extra 3 months, or the full 5 years, or anything in between, your personal budget is often the main determinant.

Second, if you have more than one important debt you need to pay, you often have flexibility about that. For example, let’s say you owe back home property taxes and child support, and recent income tax. All of them have to be paid in full before the end of your Chapter 13 case. But the property taxes accrue high interest. The child support you feel morally obligated to catch up fast. The income tax is not accruing interest. Your Chapter 13 payment plan could likely get the property tax and child support caught up before paying anything on the income taxes.

Third, Chapter 13 flexibly keeps your options open. For example, if you’re considering selling your home at some point, your payment plan could schedule that for 3 years into your case. You could keep your plan payments lower until paying a lump sum out of those later home sale proceeds. Or you may be able to leave that potential home sale open-ended, depending on what happens in the meantime.

Conclusion

As you can see, Chapter 7 and 13 each turn time in your favor, depending on what you need. If you don’t have a lot of debt that would not be discharged in a Chapter 7 case, then its quickness can be a big advantage. If you do have debt that would survive, Chapter 13’s length can be a great advantage. It not only buys you time but gives your protection and flexibility for dealing with these special debts.