Chapter 7 is usually much better if one of your high priorities is to favor a debt by paying it. You can do so more easily and flexibly.
Our last blog post was about debts that you still pay after a Chapter 7 “straight bankruptcy” case. These included debts you might WANT to pay as well as those that you are legally REQUIRED to pay.
Today we focus on debts you might want to pay for no reason other than a sense of moral or personal obligation. That is, you’re not paying in order to be allowed to keep some collateral. You’re not “reaffirming” a mortgage or vehicle loan to keep the home or vehicle. (We’ll get into “reaffirmations” next time.)
One reason we’re looking at debts paid out of personal obligation is because how different this is in Chapter 7 vs. Chapter 13. For reasons we’ll show, it’s legally easy to favor such a debt in Chapter 7. But it’s not practical to do so in Chapter 13.
The Myth about Not Favoring a Debt after Bankruptcy
People have many fears about filing bankruptcy that are based on myths. One myth is that they think they won’t be allowed to pay a debt that they really want to pay.
Like most persistent myths this one is based on something that’s true only in certain limited circumstances. But then people assume it applies to them when it likely doesn’t.
It’s true that in certain circumstances in bankruptcy, debts within the same legal category must be treated the same. Similarly, in a Chapter 13 payment plan all unsecured debts that are not “priority” debts are paid the same percentage.
However, after a Chapter 7 case (by far the most common type) you are completely free to pay any debt that you feel like paying. The Bankruptcy Code is very direct about this: “[n]othing… prevents a debtor from voluntarily repaying any debt.” Section 524(f) of the U.S. Bankruptcy Code.
Don’t Avoid Filing Bankruptcy Because You Want to Pay a Debt
So being concerned about wanting to pay a debt for personal reasons is not a reason to not file bankruptcy.
And it’s certainly not a reason to put off seeing a competent bankruptcy lawyer about your options. The job of your lawyer is to listen to your concerns and help you solve them. If one of your priorities is to pay a debt for whatever personal reason, your lawyer will explain your options for meeting this priority. There are usually sensible ways to meet all of your concerns.
Scenarios for Wanting to Pay a Debt
In our experience there are three basic reasons people want to pay a debt they aren’t legally required to pay.
First, they think something bad will happen—legal or personal—if they don’t pay. For example, they want to pay a doctor bill because they think the doctor otherwise won’t be willing to see them anymore. (That is often not be true, so it’s worth asking the doctor’s staff.)
Second, they don’t want the creditor to know about their bankruptcy filing. For example, they’ve borrowed from their father and don’t want him to be disappointed in them.
Third, they simply feel some kind of deep personal obligation to make good on their promise to pay. For example, they want to repay a grandmother because she really needs the money.
If you filed a Chapter 7 case, in each of these types of situations you would likely be allowed to pay that debt while paying nothing on other debts.
Easier to Pay a Personal Debt after Chapter 7
If it isn’t obvious, paying such a personal debt should be much easier after filing a Chapter 7 bankruptcy case. You don’t have the financial pressure of your other debts, hopefully giving you more cash flow. So, filing a Chapter 7 case actually helps you pay a debt or two that you really want to pay.
Discharge of the Personal Debt Gives You More Flexibility
Assume that the debt you want to pay is a legally enforceable debt. (It may be a gift or not legally enforceable on some other basis.) If it is a legal debt you’ll need to list it as a debt in your Chapter 7 case. And in all likelihood it will be discharged—you will no longer owe the debt, legally speaking. The choice whether or not to pay it then becomes completely yours. Your creditor cannot legally compel you to pay it.
This means that you can pay it as slow or as fast as you want. You can pay for a while and then decide that it wasn’t such as good idea to pay it after all. You can pay only if the creditor treats you right—whatever. It’s up to you and whatever is motivating you to pay the debt.
Realize that your creditor should be doubly impressed if you do pay the debt. Not only are you going through bankruptcy in part to be able to pay this particular debt. You are also paying it in spite of no longer having any legal obligation to do so. You might want to tell these things to your creditor to get points for being so good!
Chapter 7 vs. 13 on a Voluntary Debt
We mentioned earlier that you have to pay all regular unsecured debts the same percentage of their debts in a Chapter 13 payment plan. You can’t favor one over the others except for very limited reasons. Feeling a greater moral or personal obligation toward one debt does not count.
AFTER your Chapter 13 case is over you CAN pay anybody as much as you want. If paid everyone 10% of what you owed them, you can arrange to pay one the remaining 90%.
But that’s not very practical in most situations because a Chapter 13 case usually lasts 3 to 5 years. Most creditors aren’t going to want to wait that long to be made whole. A commitment to begin finishing paying a debt so long from now is not going to impress most people. And who knows how you’ll feel that far down the line.
That’s why Chapter 7 makes more sense if one of your high priorities is to favor one of your debts. Of course you have to weigh that against other reasons to file a Chapter 7 vs. Chapter 13. This is where you really need your bankruptcy lawyer to help you sort out your priorities so that you choose the best option.