By Max Gardner:
Chapter 13 has always offered debtors advantages over Chapter 7. Rather thansurrendering control of their assets to a trustee, Chapter 13 debtors are
allowed to remain in possession of their property and they are the ones
that, at least initially, get to decide what should be kept and what may be
disposed of. Even after BAPCPA, the Chapter 13 discharge still remains
somewhat broader that its Chapter 7 counterpart, and for some debtors this
alone could be a determining factor when choosing between bankruptcy
alternatives. But Chapter 13 offers another advantage that is often
overlooked and is definitely under-appreciated in evaluating a debtor’s
bankruptcy options. When it comes to retaining assets and dealing with the
liens against them, Chapter 13 does not punish failure the way Chapter 7
Even after they file bankruptcy debtors still need a roof over their heads,
a bed to sleep in, and a way to get to work. Non-bankruptcy exemption laws
recognize this reality and allowing debtors to retain necessary assets is a
primary reason for their existence. Yet, those assets are often encumbered
by liens and in order to keep them the Chapter 7 debtor must strike a deal
with the lienholder. This triggers the reaffirmation process of section 524,
where, in return for the opportunity to keep liened property, the debtor and
the creditor agree that the debt will survive the discharge.
The reaffirmation process has always been viewed with suspicion and, at
best, is probably a necessary evil. By allowing the survival of many of the
same debts that may have helped drive the debtor into bankruptcy, it runs
counter to bankruptcy’s purpose of giving a fresh start. Its history
reflects continued efforts to restrict it and, by always making it more
difficult and more technical, to help ensure that debtors really, really
know what they are doing when they enter into these types of agreements and do so with their eyes wide open.
The reaffirmation process in Chapter 7 suffers from two major shortcomings.
The first is relatively well known and that is, when it comes to negotiating
the agreement, the creditor holds most of the cards. Although some creditors are willing to negotiate the amount of the debt to be repaid, the interest rate, or other terms of payment, many adopt a decidedly take it or leave it approach to the issue, and focus more upon getting every possible dime out of the debtor rather than upon what the creditor might realistically expect to receive following foreclosure or repossession. For a debtor who is seeking to retain property that is necessary to its post-bankruptcy existence and lacks the resources to afford a lump-sum redemption, the only option is to agree to the creditor’s demands or threaten to convert to Chapter 13, which is usually not viewed as much of a threat at all. The debtor who begins by filing Chapter 13 puts itself in a somewhat better bargaining position. While there are some things that a Chapter 13 plan cannot do, at least not without the creditor’s consent, the Chapter 7 debtor negotiating the terms upon which it will keep liened property is no better off and, unlike the Chapter 13 debtor, does not have the opportunity to litigate issues in dispute.
The second shortcoming of reaffirming debts in Chapter 7 is less obvious,
but even more significant. That involves the consequences of failure. The
Chapter 7 debtor who fails to successfully perform a reaffirmation agreement is stuck with the debt. Not only can the creditor foreclose upon or repossess its collateral, but the debtor continues to be liable for any
deficiency following a sale, and the creditor can collect that deficiency
from the debtor’s income or non-exempt assets just as though bankruptcy had never been filed. Furthermore, the Chapter 7 debtor who fails to perform a reaffirmation agreement has nowhere to go to get out from under the reaffirmed debt. Although it does have the opportunity to file Chapter 13, four years must pass before it will be eligible for a discharge, and so the
defaulted upon, reaffirmed debt will likely have to be paid in full.
The Chapter 13 debtor who tries to pay secured creditors under a confirmed
plan, but is unable to do so, is nowhere near as badly off as its
unsuccessful Chapter 7 reaffirming counter-part. It has the option of
modifying the confirmed plan which will allow it to try something else;
seeking a hardship discharge B which will put it in much the same position
as if it had filed Chapter 7 in the first place; dismissing the case which
will give it the opportunity to refile and get a discharge later on; or
converting the case to Chapter 7 and getting a discharge. This is the big
and under-appreciated advantage of Chapter 13. The unsuccessful Chapter 13 debtor has meaningful options that allow it to deal with and be relieved of
debts it tried but was unable to repay.
So, when I consider Chapter 13, I see the opportunities it offers debtors
and the most important one may be the opportunity to try, and to fail, and
in failing lose nothing. In a world where second