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For the past five weeks, I’ve written about the differences between chapter 7 and chapter 13 bankruptcy cases. It’s taken a lot of words to go through the differences between the two chapters. For the client considering filing a bankruptcy, the choices can be somewhat daunting, so it’s important for our clients at Kain & Scott to know as much as possible about the differing approaches to debts that are present in chapter 7 and chapter 13. Only when clients have a full understanding of the operation of both chapters, and the outcomes with respect to various types of debt can the client make an informed choice regarding which chapter is best for them.
This week, I’ll try to tie up some loose ends regarding the two chapters. There are some situations that don’t come up commonly, but that have existed for some clients of mine over the years that result in chapter 13 being used rather than chapter 7. I’ll go through those this week.
Chapter 13 has a co-debtor stay
Some of our clients at Kain & Scott have debts for which other people have co-signed liability - and these co-signers are typically close relatives. None of my clients have ever wanted to get their friends or relatives “sucked in” to their financial problems. If the client takes no action to deal with a default on a co-signed loan, and the client is unable to make the payment, eventually the co-signer will be asked to pay the debt. If the client opts for a chapter 7 bankruptcy in a case where there is co-signed debt, the chapter 7 debtor will need to be current on the co-signed obligation in order to avoid having the co-signer contacted for collection. If the chapter 7 debtor cannot do so, the creditor will contact the co-signer - the filing of the chapter 7 case does nothing to protect a co-signer from collection.
Chapter 13 is different. Section 1301 of the Bankruptcy Code offers protection for co-signers provided that the debt involved is “consumer” debt. Called the co-debtor stay, the law provides protection for co-signers as long as the chapter 13 case is pending - anywhere from three to five years. During that time, the creditor cannot contact the co-signer for payment. When the chapter 13 debtor receives his discharge, then the co-debtors stay is dissolved, and the co-signer will have to deal with the unpaid balance on the account with the creditor.
Chapter 13 allows for payment in full of some co-signed debt, even if other creditors are not paid in full
The ability of a chapter 13 debtor to create a separate class of unsecured creditors is a unique feature of chapter 13. Again, the separate class will typically come up in a situation with a co-signer. The requirement if a separate class is created is that the chapter 13 debtor must be the beneficiary of the debt. So the chapter 13 debtor who received the loan proceeds on an unsecured debt with a co-signer can propose to pay that debt in full, even though other unsecured debt, that doesn’t have a co-signer, is only being paid a fractional amount of what is owed.
Chapter 13 offers protection for people with a recent bankruptcy filing
There really aren’t a lot of “repeat customers” in bankruptcy cases. Most people who file one bankruptcy case will never have to file another; but nationally, about eight per-cent of all the people who file bankruptcy in a given year have a previous bankruptcy filing. Congress has made it clear that it wants to discourage people from filing chapter 7 bankruptcy cases when they have had a previous chapter 7 case that successfully concluded with a discharge, by conditioning a chapter 7 discharge on the fact that the chapter 7 debtor has either never filed a bankruptcy case before, or that if a prior case that resulted in a discharge has been filed, that it has been at least eight years from the date of filing the earlier case to the date the new case is filed. Filing a chapter 7 case “too soon” results in a motion of dismissal against the debtor by the US Trustee’s office - and if, in fact, there has been a chapter 7 case that resulted in a discharge filed less than eight years before the new filing, the court will dismiss the “new” chapter 7 case.
But debtors can receive a discharge in a chapter 13 case if it’s been at least four years since they filed a chapter 7 case that resulted in a discharge. So for the debtor with a prior chapter 7, chapter 13 may be the only viable option to resolve pressing debt issues.
Chapter 13 offers protection even if a discharge isn’t possible
There’s a smaller sub-set of debtors for whom the prior chapter 7 filing was so recent (less than four years before the present case), that there’s not a chance to get a discharge in a chapter 13 case. But for clients facing a foreclosure, or bank levies or wage garnishments because of a mortgage default, or the default on an obligation that was not discharged in the previous chapter 7, filing a chapter 13 case at least offers some protection for debtors in emergency situations. So the debtor who, for instance, has defaulted on his mortgage obligation, but has a chapter 7 case from three years ago still has a chapter 13 option even though the chapter 13 case will not resolve in a discharge. In this type of case, the chapter 13 debtor can propose to cure the mortgage default over a three- to- five year period to preserve his home ownership. And while the chapter 13 case won’t result in a discharge for the debtor at the completion of the chapter 13 plan, the purpose of the filing will be served: the chapter 13 debtor has caught up on his mortgage payments and preserved his home ownership.
Again, these examples are for situations that are not common - but these situations do come up. And when they do, the attorneys at Kain & Scott can help our clients, even if their situation has some complexity to it.
