The cost for filing Chapter 7 is about $1,500 for a lawyer plus a filing fee of $306 versus roughly $3,500 for a lawyer plus a filing fee of $281 for Chapter 13 (attorney fees are paid mostly as part of the repayment plan). Nearly two of every three Chapter 13 plans are not completed, which means the filers’ remaining debts are not discharged, leaving them right where they started. If a bankruptcy case is dismissed, creditors can resume their collection activity, including car repossessions, home foreclosures, and the garnishment of wages. If all payments are made, at the end of the repayment period the filer typically keeps his or her property and the court has the option of discharging all unsecured debts.
A recent study by researchers from the University of Illinois and University of Arizona found that African Americans are twice as likely as whites to wind up in Chapter 13 bankruptcies as they try to dig out from their debts. Evidence suggested that bankruptcy lawyers steered black debtors into filing Chapter 13 more so than whites even when they had similar financial challenges.
African Americans as a whole are more likely to file Chapter 13 to try to save a house or a car, or because they feel a moral obligation to pay their debts back, says Waverley Madden, a bankruptcy attorney, of her experiences dealing with clients of her firm, the Philadelphia-based Madden Law Firm P.C. If circumstances change, for example you have a new job–and you fell behind because of a job loss–then filing Chapter 13 makes sense to try and play catch-up. It would allow you to consolidate, prioritize, repay, and, in some cases, reduce or eliminate old debts while receiving the protection against creditors that the bankruptcy court provides.
While a Chapter 7 bankruptcy offers more financial relief, it has become more difficult to qualify under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. You must pass a “means test,†which reviews factors such as income and debt load to determine one’s ability to repay all debts. For example, if your monthly income minus certain expenses and debt payments exceeds a certain amount, then the court would say you have enough disposable income to pay your debts over an extended period of time, so you’d be denied the right to have your debts discharged under Chapter 7.
(Continued on next page)