Chapter 13 protects you while you catch up on or pay off important debts.
Chapter 7 sometimes doesn’t help you enough with certain debts. Those tend to be ones that either can’t be written off or you don’t want to write off. Examples are relatively recent income tax debts, child and spouse support that you’re behind on, and unpaid home mortgage payments.
There are times when filing a straight Chapter 7 case will help you enough by writing off your other debts so that you have the financial means to take care of the remaining special debt that does not get written off. But other times you need the extra protection that a Chapter 13 payment plan gives you.
Three special kinds of debts were mentioned above: income taxes, child and spousal support, and mortgage arrearage. The following shows the ways Chapter 7 can sometimes help with these special debts, along with ways that Chapter 13 can help more if it’s necessary.
Some income taxes can be discharged (written off) in bankruptcy, including under Chapter 7. But some can’t.
Although there may be some other considerations in your situation, generally the tax you owe has to meet both of two conditions to get discharged:
1. More than 3 years must have passed from the time your tax return for the tax was due until the time the bankruptcy is filed. Plus if you got an extension to submit that tax return, add that extended time to the 3 years.
2. More than 2 years must have passed from the time the tax return was actually submitted to the IRS/state until the time the bankruptcy is filed.
If you owe a tax debt that will not be discharged, filing a Chapter 7 case might still make sense. The tax debt may be modest enough so that you can make payment arrangements (by yourself or with the help of your attorney) directly with the IRS or state tax agency). If the monthly payment amount is manageable, Chapter 7 could the more sensible way to go.
But what if the tax amount is too large so you can’t afford to pay the IRS/state the monthly installment it is requiring? Or what if you have a number of debts that would not be discharged under Chapter 7 and they’ll be competing with the IRS/state for your money afterward?
In these situations Chapter 13 would help in the following ways:
- You would likely get more time to pay off the tax.
- The IRS or state agency would be prevented from taking collection action against you, your income, and your assets, at least not without first getting permission from the bankruptcy court.
- You would usually not have to pay interest and penalties on the tax debt from the time your case is filed. This enables you to pay off the tax debt with less money.
- You can generally pay other even more important debts ahead of the taxes, giving you more flexibility.
Child and Spousal Support Arrearage
State laws allow ex-spouses and support enforcement agencies to be extremely aggressive in their collection methods. Nevertheless, if you are behind on support payments you may be able to arrange a catch-up program with them directly. This greatly varies from one locality to the next, and depends on the circumstances of your case. So, if in your situation you can make such arrangements, and are very confident of being able to maintain the agreed payments after discharging your other debts, then Chapter 7 may make sense for you.
But otherwise you need the extraordinary power of Chapter 13. It can give you as much as five years to bring the support current, although you may want to and be able to do so much earlier. You do have to meticulously keep up with your ongoing monthly support payments in the meantime, assuming you still owe them. You also have to keep making your Chapter 13 plan payment on time, since that is the source for curing the support arrearage. But as long as you fulfill these requirements throughout your Chapter 13 case your ex-spouse and support enforcement agency are prevented from using the very tough collection tools against you usually available to them.
Home Mortgage Arrearage
If you are behind on your home mortgage but want to keep the home, you can file a Chapter 7 case and try to work out the terms for catching up on the mortgage directly with your lender. But you are at its mercy regarding how much time you will have to do so. Your bankruptcy attorney likely has a good idea what your particular lender will allow in your circumstances, but you don’t have much leverage if your lender wants you to pay faster than you can afford.
In contrast, similarly to what we said above about support arrearage, Chapter 13 will give you three to five years to catch up on unpaid mortgage payments. So, if you are too far behind to be able to catch up within the time your lender would give you under Chapter 7, then you can get the time and protection you need under Chapter 13.