Chapter 7 vs. Chapter 13
I can usually determine rather quickly in our initial meeting whether a client is eligible to file a Chapter 7 based on what they tell me about their income and assets and what they have done recently. My goal initially is to place clients in a Chapter 7 if that will solve the issues at hand. Sometimes there are issues that cannot be addressed in a Chapter 7, and therefore a Chapter 13 is preferable from the beginning. For example, if taxes are not dischargeable, they can be paid off in a Chapter 13 over five years and. without any interest or penalties and without the IRS being able to place a lien on your assets. Also, if you own a piece of real estate that is underwater and the IRS has a claim, it is possible in a Chapter 13 to cram down the IRS debt to the value of the home and save clients thousands of dollars.
Other times a client is over the statutory limits for filing a Chapter 13 unsecured debt limit of $383,000 and secured debt limit of $1,080,000. There are no debt limits in a Chapter 7, so in a recent case I had, where the clients had over $700,000 in unsecured debt, I was still able to file a Chapter 7. There are cases in which a client is neither eligible to file Chapter 13 for debt limits nor can file Chapter 7 because of means testing. In this instance, a Chapter 11 may be the only solution. When a case is filed is often extremely important and may alter my strategy. I may suggest to a client that they delay a Chapter 7 filing because they tell me they just had the best six months of business or they just received a large bonus last month. Other clients have to wait to file because of the required eight years between Chapter 7 filings. Once four years have elapsed since the discharge from the Chapter 7, I can file a three-year Chapter 13 (provided the debtor is under median) and still obtain a discharge for the debtor in a pot plan, meaning that the creditors are paid pro rata from the trustee rather than at 100 percent, which would be the only option if the Chapter 7 was less than four years prior. Another tool used for eligibility in Chapter 7 is the property exemptions that allow debtors to protect their assets while still being discharged of their unsecured debt. Each state has property exemptions that vary widely across the country. New Jersey is an opt-out state, which allows me to select the federal property exemptions that are more favorable to my clients, and therefore, that I always utilize.