Chapter 13 protects you while you catch up on or pay off very important debts.
Chapter 7 sometimes doesn’t help you enough with certain debts. They are ones that either can’t be written off or you don’t want to write off. Included are some income taxes, child and spouse support you’re behind on, home mortgage arrearage, and vehicle loans, among others.
There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the practical means to take care of the remaining special debt. But other times you need the extra protection that a Chapter 13 payment plan gives you.
Here are the ways Chapter 7 could help with the first three of the special kinds of debtsv just mentioned above, and ways that Chapter 13 can help more if necessary. The fourth kind—vehicle loans—are in some respects more complicated, so they’ll be addressed separately in an upcoming blog.
Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7, but some can’t, generally more recent ones. If you have a tax debt that will not be discharged, but is the only debt that will not be and is small enough, you can file a Chapter 7 case and make payment arrangements (by yourself or with the help of your attorney) directly with the IRS (or applicable state tax agency). If the monthly payment amount is manageable, this could well be the sensible way to go.
But if the tax amount is too large for what you can afford to pay, or you have a number of debts that would not be discharged under Chapter 7, then Chapter 13 would help in the following ways:
- You would likely get more time to pay off the tax.
- The IRS or state agency would be prevented from taking collection action without permission of the bankruptcy court.
- Generally you would not need to pay interest and penalties from the time your case is filed, allowing you to pay off the tax debt with less money.
- You’d be usually be allowed to pay other even more important debts ahead of the tax, giving you more flexibility.
Child and Spousal Support Arrearage
State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods. Nevertheless, if you are behind on support payments you may be able to arrange a catch-up program with them directly. This greatly varies from one locality to the next, and depends on the circumstances of your case. So, if in your situation you can make such arrangements, and are very confident of being able to maintain the agreed payments after discharging your other debts, then Chapter 7 may make sense for you.
But otherwise you need the extraordinary power of Chapter 13. It gives you three to five years to pay the support current, as long as you rigorously keep up with your ongoing monthly payments in the meantime. And throughout this time all of the very tough collection tools usually available to your ex-spouse or support agency are put on hold for your benefit.
Home Mortgage Arrearage
If you are behind on your home mortgage but want to keep the home, and you file a Chapter 7 case, you are at the mercy of your mortgage company about how much time you will have to catch up on the mortgage. Your attorney likely has a good idea what your particular lender will allow. Often the period of time for catching up is about 10-12 months.
In contrast, similarly to what is stated above, Chapter 13 will give you three to five years to cure that arrearage. So, if you are too far behind to be able to catch up within the time you would be given under Chapter 7, then you need to file under Chapter 13.