Chapter 13 is a much stronger and more flexible tool for dealing with priority debts than Chapter 7.
“Asset” Chapter 7 Case As a Rare Solution to Priority Debts
The last blog showed how sometimes Chapter 7 can be a good tool to pay or reduce your priority debts. The most common priority debts are child support, spousal support, and recent income taxes.
As the last blog illustrated, it takes quite an unusual “asset” Chapter 7 case to deal successfully with your priority debt(s). You need to have an asset or assets that are not protected—they don’t fit within an applicable exemption—that you would be happy and willing to surrender to the trustee (or you are willing to pay the trustee to allow you retain them). Then the proceeds of the trustee’s sale of that asset needs to be enough to pay off or at least significantly pay down your priority debt(s), after paying any costs of sale (such as a broker’s commission) and the trustee’s fee. This is a relatively rare combination of events, with a significant element of risk because sometimes it is difficult to estimate accurately how much the trustee will be able to sell a surrendered asset for.
Chapter 13 As a More Likely and Favorable Solution
Chapter 13 is much more likely to work because it is much more flexible and leaves you much more in control of the situation. Here are some ways that it is better than Chapter 7, and better than trying to pay your priority taxes or back support outside of bankruptcy.
1. Protection from the priority creditors
The federal and state tax authorities and support enforcement agencies have been given extraordinarily aggressive collection powers against you. These often include the ability to seize your assets; garnish your wages, bank accounts, and business receivables without additional court proceedings; and in the case of support enforcement, to suspend your driver’s and occupational and professional licenses. In the case of support enforcement, such collection efforts can even continue when you file a Chapter 7 case. Then if you continue to owe these debts after your Chapter 7 is completed, both the tax and support creditors can continue their collection efforts as soon as your Chapter 7 is completed. This generally only gives you a three or four month break. In contrast, Chapter 13 stops virtually all of these collection efforts, so long as you comply with the terms of your payment plan, as well as keep current on regular support payments and tax obligations.
2. No ongoing interest and penalties
Usually in a Chapter 13 case, the interest and penalties on priority debt stops being added as soon as the case is filed. Usually the penalties that had accrued up until then is discharged at the end of the case. If you have a large income tax debt, this can significantly reduce the amount you would have to pay before you were done.
3. Get a more sensible budget
Your monthly obligation under Chapter 13 tends to be based on more realistic expenses than what the IRS or your support enforcement agency would generally allow, if you had to make payment arrangements after the completion of a Chapter 7 case.
4. Favor the priority debts over the other debts
Usually you are able to and indeed must pay your priority debt ahead of and often instead of your “general unsecured creditors.” That is often to your advantage, usually just reducing the money that would be paid to other creditors. This means that you are able to focus your financial efforts on paying off the priority debts, which are usually in your self-interest to pay anyway because they usually cannot be discharged in either Chapter 7 or Chapter 13.