Mary wants to know whether it is better for her to file a Chapter 7 petition or a Chapter 13 petition. The following facts apply to Mary’s case:
Car loan by BIG BANK: $8,000.00
Credit Cards: $40,000.00
Other Pertinent Information:
Disposable Income: $453/month
Nonexempt Equity: $4,000.00
Chapter 7 Analysis
Relief under Chapter 7 will provide Mary with the following advantages and disadvantages:
$40,000.00 in credit card debts will be discharged (i.e. forgiven).
Mary will need to account for the fact that she has $4,000.00 in nonexempt equity in one or more of her assets. She can do so by paying the $4,000.00 to an Interim Trustee for the benefit of her creditors or the Chapter 7 Interim Trustee will probably sell the particular asset(s) which make up this $4,000.00 and use the sale proceeds to pay Mary’s creditors to the extent of the funds received.
If Mary wants to keep her car, she will need to continue making payments to her creditor, BIG BANK, who has a lien on the car.
The lien remains on the car, although Mary’s personal obligation to repay the promissory note she signed when obtaining the car loan will be discharged, unless she now signs a Reaffirmation Agreement which would obligate her on the original car debt.
Chapter 13 Analysis
If Mary successfully completes the following Chapter 13 plan, she can expect the following advantages and disadvantages:
Proposed Chapter 13 Plan
Pay car lien (with 9% interest or less)
Pay credit cards $4,000.00
Pay partial Attorney fees $850.00
Pay Chapter 13 Trustee fee $1,482.00
Total to be paid: $16,297.00
Monthly Chapter 13 Plan Payout = $453 for 36 months
Mary would not need to come up with the $4,000.00 to pay the Chapter 7 Trustee for the non-exempt car equity by making monthly installment payments over 1 year or other agreed upon terms to pay that within 1 year. Rather, she can pay that amount over a 3-5 year period in Chapter 13.
Credit card creditors will be paid a total of $4,000.00 and the remaining $36,000.00 (i.e. 90%) will be discharged (i.e. forgiven)
BIG BANK will be paid in full (with interest) and the lien held by BIG BANK on Mary’s car then will be released.
Mary does not have to pay all of her Attorney’s fees prior to the filing of her petition. Rather, some of Mary’s attorney’s fees will be paid using money she sends to the Chapter 13 Trustee.
In Chapter 13, Mary has a Chapter 13 Trustee fee to pay ($1,482.00 in the above example) and the percentage to be paid to unsecured creditors (10% in the above example) may increase if she gets more income (and/or has less expenses) while she is in her plan.
In Mary’s case, Chapter 7 may be preferred if Mary can pay the Trustee the non-exempt ($4,000.00) within one year, otherwise Chapter 13 will be preferred.