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Example 3 — Chapter 7 vs. Chapter 13

Kenny wants to know whether it is better for him to file a Chapter 7 petition or a Chapter 13 petition. The following facts apply to Kenny’s case:

Debts:

Behind on mortgage to BIG BANK: $10,000.00
Credit Cards: $20,000.00

Other Pertinent Information:

Disposable Income: $300/month
Nonexempt Equity: $500.00

Chapter 7 Analysis

Relief under Chapter 7 will provide Kenny with the following advantages and disadvantages:

Advantages:

$20,000.00 in credit card debts will be discharged (i.e. forgiven)

Disdvantages:

Chapter 7 would not be recommended to Kenny because he would risk losing his house to a foreclosure because he is significantly behind on mortgage payments. Of course, Chapter 7 may be recommended for Kenny if he can resolve his mortgage problems in other ways, such as with a mortgage modification.

Chapter 13 Analysis

If Kenny successfully completes the following Chapter 13 plan, he can expect the following advantages and disadvantages:

Proposed Chapter 13 Plan

Pay arrears on mortgage

$10,000.00

Pay credit cards $500.00

Pay partial Attorney fees $850.00

Pay Chapter 13 Trustee fee $1,135.00

Total to be paid: $12,485.00

Monthly Chapter 13 Plan Payout = $250 for 50 months

Advantages:

Credit card creditors will be paid a total of $500.00 and the remaining $19,500.00 (i.e. 90%) will be discharged (i.e. forgiven)

Money sent by Kenny on a monthly basis to the Chapter 13 Trustee in the amount of $250.00/month will be used to pay the missed payment to BIG BANK in the amount of $10,000.00. As long as the plan is confirmed by the Bankruptcy Court, BIG BANK cannot begin a foreclosure of Kenny’s house if Kenny is complying with the terms of his plan

Kenny does not have to pay all of his Attorney’s fees prior to the filing of his petition. Rather, some of his Attorney’s fees will be paid using money he sends to the Chapter 13 Trustee.

Disadvantages:

None

Summary:

In Kenny’s case, a Chapter 13 bankruptcy appears to be the wiser decision because he can hold on to his home and assets, while paying his mortgage arrears and erasing a significant amount of credit card debt.

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