When most people hear the word “bankruptcy”, they immediately think of a Chapter 7 liquidation action where most, if not all, unsecured debts are eliminated.  Those individuals who are familiar with a Chapter 13 however, usually have the notion that a Chapter 13 is not as beneficial as a Chapter 7. The easiest way to distinguish between Chapter 7 and Chapter 13 bankruptcies is to remember that in a Chapter 7, the debtor is considered to have no assets and all unsecured debts are eliminated.  By contrast, a Chapter 13 debtor has a sufficient amount of assets and/or income, and as a result, is only allowed to reorganize his or her debt rather than eliminate it.  Keep in mind that a Chapter 13 debtor, unlike some who file Chapter 7, may be able to hold onto their assets.  At first glance, a Chapter 7 may sound like the better deal, and for many debtors, it certainly is. But for other debtors, especially those that have assets that they would like to retain, a Chapter 13 is often a better choice.  And, sometimes it is the only choice.

For example, consider a hypothetical debtor who is employed but experiencing financial troubles. He is behind on his mortgage payments and cannot catch up to due to his credit card bills and his automobile loan. The debtor does not qualify for a Chapter 7 bankruptcy since his income exceeds the cap. However, if the debtor files for a Chapter 13 bankruptcy, one tool that he may have available to him is known as a “cram down”. A cram down allows a debtor to reduce the principal balance of a secured debt on personal property to the value of the property. For example, if a debtor owes $25,000 on his vehicle but the vehicle is only worth $17,000, the vehicle loan could be crammed down to $17,000. The remaining $8,000 would be combined with all of the debtor’s other unsecured debts, and he would only repay a percentage back over the course of his three to five year plan. A cram down might also allow the debtor to reduce the interest rate and stretch out the payment period, which would result in the debtor having a much lower monthly car payment.

In order to qualify for a vehicle cram down, the vehicle must have been purchased more than 910 days prior to the time the debtor filed for bankruptcy.  This rule prevents debtors from purchasing a new car just prior to filing bankruptcy and being able to cram down the depreciation that happens soon after the vehicle leaves the lot. For all other personal property, the property must have been purchased at least one year prior to the bankruptcy filing. 

The decision of whether to file a Chapter 7 or Chapter 13 can only be made after an evaluation of a debtor’s income, assets and debts. If you are wondering if bankruptcy could help your financial situation, contact my office today at 913-742-8700 to schedule a free consultation. I will make sure that you understand all of your options under the bankruptcy code and even offer non-bankruptcy alternatives that meet your specific needs.