Interviewer: Can you give us an example of what sort of person would prefer chapter 13 bankruptcy over chapter 7? What sort of financial standing should they have at the current time?
James Logan: From the debtor’s perspective, chapter 13 is preferable when you have a house or a car that you want to hold on to and you’re behind in the payments. That’s the main reason people file chapter 13 is to save a home from foreclosure and save a car from repossession. Otherwise, a vast majority of people will rather just file a chapter 7, wipe out all the debts and move on with their lives. And if you’re up-to-date in your mortgage payments and you’re up-to-date in your car payments, many times we can’t file a chapter 7 to wipe out your debts and you can just keep making your mortgage payments and keep making your car payments like nothing ever happened and you can keep your house and your car. From the trustee’s or the court’s perspective, they don’t want you filing a chapter 7 if you have a lot of assets that we can’t protect in chapter 7.
People That Fail the Means Test and are Facing Foreclosure Tend to File a Chapter 13
That’s one reason, a lot of times people come in and they get too much equity in their house or other assets that we can’t protect, so I’ll say, “Hey, we can’t file a chapter 7 because the trustee would sell your house to pay your debts”, so those cases are forced to file a chapter 13 because they can’t file a chapter 7. The other situation is a lot of times we’ll get people with high incomes and there’s a means test that you’ll have to pass in a chapter 7. For a household of one, it’s about 50,000, for two it’s 75,000, for three it’s 85,000 and it goes up about $10,000 per person after that. So, if you have two people making $60,000 year each, the household income is $120,000, they’re probably going to be over the income limits and not eligible to file a chapter 7. So, they will be forced to file a chapter 13 if they want to get bankruptcy relief.
A Creditor Cannot Continue a Lawsuit Against a Debtor After a Chapter 13 Has Been Filed
Interviewer: Could someone still be sued or their wages garnished while the plan is in effect?
James Logan: No. In chapter 13, none of your creditors can continue any lawsuits against you and they can’t garnish your pay checks, they can’t call you and they can’t harass you and they can’t do anything. So, you’re protected basically for 5 years.
Common Client Concerns When Meeting An Attorney to File Bankruptcy
Interviewer: When you meet with the client for the first time, what are some of their main concerns? What are some of their immediate needs that they share with you?
James Logan: The number one fear of all clients, either chapter 7 or chapter 13, is they’re going to lose everything and they’re going to be out on the street and homeless or they’re going to lose their car and they won’t be able to get their work, and that’s the number one thing that we tell them, “Look, my job as a bankruptcy attorney is to make sure that you keep all the assets you can under the law and that you don’t lose anything and then we’re going to help you save your home or save your car”. Once people find that out, sometimes they’ll start crying with the relief because they’ve been so worried about it.
People Generally Don’t Understand that the Point of Bankruptcy is to Provide a Fresh Start
They just don’t understand that the point of bankruptcy is not to take everything you owe and leave you homeless in a box in the street but to allow you to make a fresh start but balance it with the right of the creditors to get paid. In fact, if you look at the bankruptcy court website, it says exactly that that their mission is to balance your right to have fresh start along with the creditor’s right to get paid. So, in a chapter 7, that’s why you’re allowed to keep a certain amount of stuff to make a fresh start with but not keep a million dollars in cash because that’s not fair to your creditors. So, that’s a number one thing is you’re not going to lose everything in a bankruptcy, in fact 99 per cent of the time you’re not to lose anything in the bankruptcy; all you’re going to do is get rid of all your debts and sleep at night.