During Tax Season 2014 (2013 Taxes); many people consider a Chapter 7 Bankruptcy because they hope they will have enough money from their tax refund to afford the filing of the Chapter 7. The assumption is that all of the debt will be wiped out and their family will have a much better future with lower expenses. This is generally true. However, the farther you move away from simple credit card debt and add in the issues of car loans, home mortgages and unpaid taxes and the answer is less clear.
First the up front costs – since the Chapter 13 Code allows attorney fees to be awarded through the Chapter 13 case, there is very little up front cost – usually the filing fee ($281). Second, Chapter 13 allows a debtor to not only keep their car, but get caught up on past due payments. Thirdly Chapter 13 is the original way to get caught up on a home mortgage. Lastly, if you have parking ticket, fines or unpaid tax issues, Chapter 13 provides a smooth way to fix these issues.
Chapter 7 is often preferred because no debt is paid back. This is often most helpful where the debt is primarily credit cards and types of unsecured debt. Chapter 7 also is a simpler process and generally takes only 5 months to administer from filing to finish. All attorney fees and filing fees must be paid prior to filing – this is one of the biggest challenges to filers. Occasionally, debtors are allowed to pay their fees one or two months after filing using a special client representation agreement – however, this agreement has a dark side – if you do not pay, your attorney does not need to represent you after the case is filed oftentimes resulting in your case being dismissed.
Below is a quick summary of the differences between Chapter 7 and Chapter 13.
| Bankruptcy Action | Chapter 7 | Chapter 13 |
| Can Get Caught Up on Car Payments | x | |
| Can Get Caught Up on Home Mortgage Payments | x | |
| Can Lower Car Loan Interest Rate | x | |
| Can Lengthen Car Loan Term | x | |
| Can Discharge Parking Tickets | x | |
| Can Keep Car Through Reaffirmation | x | |
| Can Keep Home Through Reaffirmation | x | |
| Retirement Assets are Exempt | x | x |
| No Repayment of Any Unsecured Debt | x | |
| Takes 5 months to complete bankruptcy | x | |
| Tax Liability Can be Discharged | x | x |
| Priority Taxes (Non- Dischargeable) Paid | x | |
| Social Security Overpayment Collection Stopped | x | |
| Social Security Overpayment Paid Off | x | |
| Income Must Be Median or Less | x |
