From the archives – Why Chapter 13’s Rarely Make Sense

Why Chapter 13’s rarely make sense in Texas

In many states, Chapter 13 Bankruptcy is more common than Chapter 7 Bankruptcy. However, in my bankruptcy practice in Texas, I rarely recommend Chapter 13. In this blog post, I will attempt to explain why.

It is almost always preferable to file a Chapter 7, if you qualify (see my other post on Qualifying for a Chapter 7), because in a Chapter 7 your debts are discharged within a few months. By contrast, in a Chapter 13 bankruptcy, you must make monthly payments for five years to the Chapter 13 trustee (and the trustee distributes those payments pro-rata to your creditors) and only after 5 years do you get a discharge on whatever amount of debt is still owing at that time.

In Texas, there is no wage garnishment (i.e. no deductions from your paycheck by creditors) and the list of exemptions (i.e. the list of stuff that is exempt from levy by creditors- and thus may be kept by you) is very generous. So, the option of not filing any form of bankruptcy and doing nothing to respond to creditors attempts to collect from you is not such a bad option. This “do nothing option” is sometimes referred to as “informal bankruptcy.”

There are only two situations in which I commonly recommend that a debtor file a Chapter 13 bankruptcy:

1. Where the debtor is behind on his house and wants to force the mortgage lender to allow him to catch up on his late payments over time.

2. The situation in which the debtor makes too much money to qualify for a Chapter 7 but is not comfortable with the informal bankruptcy option, usually because he or she is a person of delicate temperament and is very bothered by the telephone calls from creditors. (NOTE: see my other post on How Creditors Can Attempt To Collect In Texas.)