Five years ago, we only filed one Chapter 13 for every four or five Chapter 7’s. These days, I find myself recommending Chapter 13 far more often than Chapter 7. Why the turnaround? There are many reasons. Here are some of them:
Assets
It has never been harder to protect assets in Chapter 7 in our district than it is today. Rules and laws have been changed over the years due to judicial decisions. One example involves vehicles. Debtors must now use the retail value of their car on their Chapter 7 bankruptcy schedules. (In Chapter 13, we still use the trade-in value.) This small detail can result in a value for the vehicle that is thousands of dollars higher than available exemptions, thereby causing the debtors to lose their car in a Chapter 7.
Stripping of Second Mortgages or Homeowner’s Association Liens
For a relatively short period of time, second mortgages and HOA liens could be stripped in Chapter 7 bankruptcies in our district. Those days are now gone. A 2014 United States Supreme Court decision, Bank of America v. Caulkett, reversed the prior ruling of the 11th Circuit Court of Appeals, holding that junior liens could no longer be stripped in Chapter 7. They can, if wholly unsecured, still be stripped in Chapter 13.
Trustee-Administered Estate vs. Debtor-in-Possession
When you file Chapter 7, any assets not specifically exempted come under the immediate control of the trustee. That includes your home and everything in it (unless you are taking a homestead exemption and have available exemptions for all the contents, which is uncommon). I have actually been in court as a trustee told another attorney’s client of his intention to send an appraiser to the debtor’s home to value his assets. While the debtor shifted uncomfortably, the trustee went on to state that he would then have a liquidator sell all over-exempt household possessions right on the debtor’s front lawn. That is an unfortunate scenario you won’t readily see outside of Chapter 7. In Chapter 13, debtors retain control of their assets as “debtors in possession.”
Some employers view Chapter 13 more favorably than Chapter 7
We represent people from all walks of life – from handymen, to teachers, to police officers, to TSA agents. One thing I have learned is that people with sensitive jobs or security clearance tend to fare better with Chapter 13 in the eyes of their employers. This first came to my attention when we were hired by an agent of the Department of Homeland Security. I was naturally concerned that bankruptcy could affect his security clearance. What surprised me was that Homeland Security seems to have no problem with bankruptcy per se. They do, however, strongly suggest a Chapter 13 instead of a 7. I have seen this same pattern with TSA agents who are told to file 13’s, not 7’s, by their supervisors. Apparently, some employers view the repayment of some debt in Chapter 13 (even if it’s only $100/month) in a more favorable light than the full discharge afforded under Chapter 7.
These are just a few of the reasons I find myself recommending Chapter 13 more often than Chapter 7 of late. In Part Two of this article, I will reveal even more of my rationale for steering so many clients towards Chapter 13.