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Chapter 7 vs. 13–the Easy Choice, and the Not So Easy

Picking the right Chapter to file can be simple, or it can be a very delicate, even difficult choice. And appearances can be deceiving. A situation that seems at first to call out for an obvious choice can turn out to have a twist or two that turns the case upside down.  

That twist can come in the form of an unexpected disadvantage in filing a bankruptcy under the intended Chapter, or instead an unexpected advantage in filing under the other Chapter.

Let me be clear. The majority of my clients walk into their initial consultation meeting with me with a strong idea whether they want to file a Chapter 7 or a 13.  After all, there is a wealth of information available—like this blog that you’re looking at now. So lots of my clients come in having read up on their alternatives. Whether their inclination to file one or the other Chapter comes from their head or from their gut, it’s often correct.

But often it is not correct.

That shouldn’t be a surprise. Although the main differences between Chapter 7 and Chapter 13 can be outlined in a few sentences, there are in fact dozens of more subtle but often crucial differences. Many of them do not matter in most situations, but sometimes one or two of those differences can be decisive in determining what is best in your case. If you did not know about them, you would file the wrong kind of case. And pay the consequences for many years.

So that this doesn’t just sound like just a bunch of hot air, let me show you through one example. Imagine that you have a home that you have been trying to hang onto for years, but by now have pretty much given up on doing so. You’ve fallen behind on both the first and the second mortgage. Besides, with the decline in housing values the last three years or so, the home is now not even worth the amount owed on the first mortgage. And say you owe $80,000 on the second mortgage, so the home is “under water” by that amount. You have no good reason to think that the market value will climb back up enough to give you equity in the home for many years.  Your family would sure like to keep living in their home, so the kids could stay in their schools and close to their friends, but it sure sounds like it makes no sense to keep trying to hang onto something worth $80,000 less than what you owe. Besides, you just can’t don’t have the money to pay both mortgages. So you figure it’s time to give up on the home, and just start fresh with a Chapter 7 “straight bankruptcy.”

But then you learn from your bankruptcy attorney that if your home is worth less than the balance on the first mortgage, through a Chapter 13 case you can “strip” the second mortgage off the title of your home. It becomes an unsecured debt which is lumped in with the rest of your unsecured debt (like credit cards, medical bills). In return for paying into your Chapter 13 Plan a designated amount each month based on your budget, and doing so for the three-to-five year length of your Chapter 13 case, you would be able to keep your home often by paying very little—and sometimes nothing—on that $80,000 balance. At the end of your case, whatever amount is left unpaid on that second mortgages will be “discharged”—legally written-off—so you own the home without that mortgage and having no debt (other than the balance on the first mortgage.  

This “stripping” of the second mortgage is NOT available under the Chapter 7 that you initially thought you should file. Having Saving your home by lowering your payments on it and bringing the debt against it much closer to its value may well swing your choice in the Chapter 13 direction.

This is just one illustration of countless ways that the option you initially think is the better one might not be. So keep an open mind about your options when you first consult with your attorney. Communicate your goals to him or her, and be clear about why you think one Chapter sounds better to you than the other. In the end, after laying out your story and hearing the attorney’s advice, it IS ultimately your choice. But do yourself a favor and be flexible, because you might get a better deal by the end of your meeting than you thought was possible at the beginning of it.

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Do Non-Citizen Debtors Get All the Benefits of Filing Bankruptcy?

In my last blog I said that non-citizens—legal or not—can file bankruptcy. All they need is appropriate identification. But that begs two questions: 1) Would that non-citizen receive all the benefits from that bankruptcy that a citizen would receive?  2) And would filing the bankruptcy hurt a legal non-citizen’s efforts to become a citizen, or would it increase an illegal immigrant’s risk of deportation?  

I’ll address the first of these questions now, and the second one in my next blog.

Two benefits of bankruptcy pertain here:

1. The protection of assets from the bankruptcy trustee (and thus from the creditors) through “exemptions.”

2. The granting of a discharge of debts.

Exemptions:

The rules about what property of a debtor is exempt do not directly change with the debtor’s citizenship status, but there are potentially very important indirect effects.

Bankruptcies filed many states use that state’s own set of exemptions. So the federal bankruptcy court has to interpret that state’s definitions of those exemption definitions. Some of those definitions and the court’s interpretations of them can disqualify some immigrants. For example, Florida has a very generous homestead exemption, but In order to qualify for it, a debtor must be a permanent resident of the state with the intent to make the property in question his permanent residence. This residency requirement can be satisfied by a non-citizen only if he or she has gotten permanent resident status–a “green card”—as of the date of the filing of the bankruptcy. In a recent case, the immigrant was in the process of getting his permanent residency and in fact received that status three months after filing bankruptcy, but he was still deemed not to be a permanent resident at the time of his bankruptcy filing and so was denied a homestead exemption.

Discharge:

Again, the rules about what debts can be discharged and which cannot are the same regardless of citizenship. But some non-citizens have debts which were incurred in another country, leading to the question whether those debts can be discharged in their U.S. bankruptcy case.

It depends.

First, assuming that the creditor is given appropriate notice of the bankruptcy, and the debtor successfully gets a discharge of his or her debts, that creditor will no longer be able to try to collect that foreign in the U.S.  

But second, there is a good chance that the U. S. bankruptcy court’s discharge of this debt does not result in the discharge of the debt under the laws of the original country. If so, then that debt can continue to be collected according to the laws of that country, presumably against the debtor’s assets in that country, and perhaps in other countries outside the U. S. This depends on complicated international issues like treaties between the U.S. and that country, and whether they have “comity”—an agreement to respect each other’s laws—specifically in the area of bankruptcy. Otherwise, if the debtor has property outside the U. S., or intends to return to the other country, even just to visit, these issues should be investigated very closely, likely with both your U. S. bankruptcy attorney and one in the other country. In some situations, it even may be necessary to file the appropriate form of bankruptcy in the other country, assuming that exists and the debtor qualifies to do so.

 

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