Chapter 13 has advantages and potential disadvantages compared to Chapter 7—it’s more flexible but there’s a chance you’ll pay more.
The last blog post was about the advantages of leaving behind your residential lease after filing a Chapter 7 case. Most of those advantages apply to a Chapter 13, too. And then some.
Reminder about Chapter 7 vs. Chapter 13
The rest of this post will make much more sense after understanding the basic differences between Chapters 7 and 13.
Chapter 7 “straight bankruptcy” is usually a 3-4-month procedure that quickly discharges (legally writes off) most debts. It doesn’t help much or at all with debts that are not discharged. Its protection against creditors lasts only a short time.
Chapter 13 “adjustment of debts” is usually a 3-5-year procedure that deals with your debts more flexibly. It can be especially helpful with debts that Chapter 7 does not discharge or does not handle well otherwise.
The Chapter 7 Advantages that Also Apply to Chapter 13
- Buys You Immediate Time
Filing a Chapter 13 immediately stops a filed eviction proceeding, just like a Chapter 7 would. (This assumes that the landlord has not yet received a judgment giving it legal possession of your residence.) The “automatic stay” protecting you from your landlord’s actions against you applies to both types of cases. See Section 362(a) of the U.S. Bankruptcy Code.
- Buys You More Time to Move
By preventing, stopping, or slowing down an eviction proceeding, filing a Chapter 13 case usually gives you more time to find a new place to live.
It prevents an eviction proceeding because the landlord can’t file one without getting bankruptcy court permission. Because you formally state your intention to “reject” the lease and leave, the landlord usually focuses its attention on making arrangements with your bankruptcy lawyer for your orderly move. That may include permission to stay for a designated number of months while you pay ongoing rent. It might even include reduced rent in return for your commitment to move on a specified date.
If an eviction proceeding has already been filed (but no judgment entered for the landlord), the same principles still apply. Your landlord may at this point be more anxious to have you move, so you may have less flexibility. But you now have a lawyer in your corner and the protection of the “automatic stay.” Plus you have less time pressure because the “automatic stay” lasts for years instead of expiring in 3-4 months. Even after an eviction is filed and “stayed” by your Chapter 13 case, your lawyer may be able to arrange for you to stay on for quite a few months.
- A Calmer Way to Leave
With the immediate prevention or stopping of an eviction, that buys you some valuable peace of mind. Having a lawyer in your corner and the ongoing “automatic stay” protection give you more of the same. Finally, you get the certainty of an agreed move-out plan, while knowing you can’t be sued for any remaining debt.
- Gets You Out of an Expensive Lease
Just like Chapter 7, going through Chapter 13 case enables you to leave an unfavorable lease. And once you complete the case, you don’t owe anything to your former landlord.
But Chapter 13 is somewhat more risky here. With both Chapter 7 and 13 you need to successfully complete the case to discharge any residual lease debt. But while a very high portion of Chapter 7s are completed, Chapter 13s have a lower success rate. That’s because they last so much longer and require you to complete a payment plan.
- Avoid Eviction Proceeding
Just like with Chapter 7, Chapter 13 usually prevents an about-to-be-filed eviction proceeding from happening. That’s good for your renter’s credit record.
The Extra Advantage of Flexibility
Filing under Chapter 13 gives you greater flexibility in a number of distinct ways.
- Budget Flexibility
Your Chapter 13 plan payment is based on what your budget says you can afford. That budget can usually provide money for after-filing monthly rent for your lender. The rent comes ahead of paying otherwise urgent debts like back child support, income taxes, and/or vehicle loan arrearage. This can be a major advantage over Chapter 7 which doesn’t empower you to prioritize like this.
- Moving-Away Flexibility
See above about the likelihood that you can stay longer because of the much longer “automatic stay” protection.
- Staying-on-the-Lease Flexibility
Under certain circumstances you’d want to “assume” your lease, knowing you can “reject” it later. If you expect to stay at your rental for now, but would benefit from knowing that you can change your mind later, under Chapter 13 you could likely do this through a couple of procedures. If your situation changes so that you need to leave your lease, your lawyer prepares a “modified” or “amended” plan. In that new plan you “reject” your lease and make arrangements for your move. This could potentially be even a couple years after initially filing your Chapter 13 case.
- Future-Chapter-7 Flexibility
The above scenario assumes that you’d benefit (presumably because of other debts) from staying in the Chapter 13 case. The other procedure for changing your mind and “rejecting” the lease is to “convert” to a Chapter 7 case. At the point in time that your circumstances change, you turn your Chapter 13 case into a Chapter 7 one. This option is better if you no longer need the benefits of Chapter 13 for other ongoing debts. It’s also helpful if you have new debts since filing the Chapter 13 case—including new obligations on the lease.
The Potential Financial Disadvantage
In a Chapter 7 case any financial obligations from the residential lease are almost always discharged in full. But in a Chapter 13 case those obligations are lumped in with other “general unsecured” debts. Most, but not all, Chapter 13 plans earmark some money towards that pool of “general unsecured” debts. However, even those plans that do pay some percentage of the “general unsecured” debts often do NOT result in you paying any more during the case overall.
Please see our blog post of February 3, 2017 regarding “rejected” vehicle leases for our discussion how this works. A hint: it’s because in most Chapter 13 cases there’s only so much money for ALL “general unsecured” debts. So, any of your money paid to your landlord on the lease debt just reduces how much other creditors receive. And you don’t end up paying any larger amount.