There’s been some discussion lately on bankruptcy lawyers steering debtors to chapter 13 when chapter 7 is more appropriate, e.g. when ProPublica found significant racial disparities in bankruptcy outcomes. This isn’t so much of an issue in New York bankruptcy cases because New Yorkers, particularly downstate, tend to file in chapter 7. However, there is one subtle reason why chapter 13 can be better, if debtors can afford it: future deteriorating financial conditions. I’m talking, here, about post-petition debt.
In chapter 7, debtors usually don’t acquire new debts while they are still in bankruptcy because their cases typically take only three months to complete. After bankruptcy is a different matter, as potential creditors descend on debtors thanks to their higher credit ratings, as well as the knowledge that debtors can’t discharge the new debts again in chapter 7 for eight years.
In chapter 13, though, the situation is different. The repayment plan debtors agree to can last between three and five years. In this time frame, it’s quite common for creditors to send debtors all kinds of offers for easy credit. Now, when it comes to chapter 13 post-petition debts, debtors have a few options for dealing with it. The first is obtaining prior court approval. Debtors who take this route can then incorporate the new debt into their plan payments, but it requires the trustee’s and the bankruptcy court’s assent. This will work so long as debtors can show that the credit is somehow necessary to complete their plans, like buying a car to drive to work.
The second alternative is seeking court approval after incurring the debt. This approach works best when debtors can explain why it wasn’t feasible to obtain prior court approval. Of course, a new creditor will file a proof of claim in the debtor’s case and receive less than it lent. The only real reason a creditor would agree to do this is if it preferred getting paid some money sooner than later.
Finally, debtors can also keep the new debt outside of the chapter 13 repayment plan. This approach carries significant risks. Debtors will need to make their payments on this debt in a way that doesn’t interfere with their incomes, which are usually fully dedicated to their plans. They will also know that these debts will not be discharged at the completion of the plans.
Nevertheless, there are times when debtors’ financial circumstances keep deteriorating. It could be one medical emergency too many, or damage to a home that requires costly repairs. Debtors who borrow money to cover these emergencies might not be able to finish their chapter 13 plans. However, they may be able to convert their cases to chapter 7 and include post-petition debts.
Here’s why this is an advantage for chapter 13 debtors: If these debtors had filed in chapter 7, they probably would have received their discharges, but their post-petition debts would not have been included in their cases. By going the chapter 13 route, these debtors would have been able to delay their discharges long enough to include some serious emergencies.
In part, this post is arguing about luck. No chapter 7 debtor includes future emergencies in their bankruptcy plans, but some debtors might be wise to do so, particularly older or retired debtors who don’t have just credit-card debt. If you are encountering financial difficulties, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
