If Chapter 7 strengthens your hand against your secured creditors, Chapter 13 turns you into Superman. It starts with a much more robust “automatic stay.”
The last blog explained how filing a Chapter 7 “straight bankruptcy” will 1) temporarily or permanently prevent your secured creditors from taking your collateral; 2) help you keep the collateral; and 3) if you want, enable you to surrender the collateral to the creditor without causing you financial harm. In each of these areas, the Chapter 13 “payment plan” gives you many more powers to achieve your goals. Because there are so many Chapter 13 powers, these three areas will be covered in the next few blogs.
Stopping Creditors from Taking the Collateral
The “automatic stay,” which immediately stops your secured creditors from taking any action against the collateral under Chapter 7, gives you that same benefit under Chapter 13. (See Section 362 of the Bankruptcy Code.) But the “automatic stay” can be tremendously stronger in Chapter 13 for three reasons:
1. Lasts So Much Longer: Chapter 7’s “automatic stay” generally lasts only about 3 months, and sometimes not even that long if a creditor asks the court for “relief from stay” to get permission to go after the collateral. At best, Chapter 7 only pauses the action against you and the collateral. In contrast, a Chapter 13 case itself lasts usually 3 to 5 years, and the protection of the “automatic stay” is in effect that entire time, again unless a creditor is successful in getting “relief from stay.”
Whether or not a creditor asks for “relief from stay” in the first place can largely depend on how we treat that creditor in your Chapter 13 Plan, and then on how well you fulfill the terms of that Plan as to that creditor. But even if the Plan is reasonable and you are making payments on it appropriately, the creditor may file a motion asking for “relief from stay” just to try to force some concessions from you. The creditor may want larger monthly payments to pay off a debt faster, or to have the advantage of a court-ordered trigger mechanism encouraging you to make the payments on time. This kind of gamesmanship can somewhat narrow the protections you get from the “automatic stay.” But it does not change the main fact that in a Chapter 13 case your collateral is usually protected for much longer, giving you a lot more flexibility in how you handle your secured debts.
2. The “Co-Debtor Stay”: A Chapter 7 case does not stop a creditor from pursuing any co-signer you may have or that co-signer’s collateral. Chapter 13 does. (See Section 1301.) There are limitations to this special kind of “stay,” so how much practical help it provides to you depends on the facts of each case. But at the very least the co-debtor stay immediately protects the co-signer, giving you a chance to get your Chapter 13 plan started and to see whether and/or how the creditor reacts.
As with the usual “automatic stay,” an affected creditor can ask for “relief from the co-debtor stay” to get permission to go after the co-signer or its collateral. Unless and until this motion is filed and the bankruptcy court decides to give this permission, your co-signer is protected. Once the motion is filed you may need to pay this creditor more to prevent it from being allowed to go after your co-signer. But sometimes you may be able to pay more to this creditor simply by paying less to your other creditors, not necessarily more out of your own pocket. Again, it depends on all the facts of your case, and also on the flexibility of your assigned Chapter 13 trustee and bankruptcy judge. The key point is that the “co-debtor stay” gives you the power to protect your co-signers immediately, and potentially forever, whereas Chapter 7 would provide no help at all.
3. Enables the Other Chapter 13 Powers to Work: Chapter 13 gives you many strong powers for dealing with secured creditors, many of which only work because of the long and continuous protection provided by the “automatic stay.” For example, unlike Chapter 7 which provides no mechanism for catching up on unpaid mortgage payments (other than whatever payment schedule the creditor voluntarily agrees to), Chapter 13 effectively gives you the entire length of the 3-to-5-year case to catch up. But this only works because throughout this time the mortgage holder is stopped from foreclosing by the ongoing “automatic stay.”
Another example illustrates well the crucial role of the “automatic stay” in Chapter 13. Most mortgage documents require the homeowner to pay the home’s property taxes either directly to the taxing authority or more often through an escrow account set up for that purpose. If the taxes are not paid by the homeowner, that is a separate violation of the mortgage agreement and separate grounds for the creditor to start a foreclosure against the homeowner. When the homeowner files a Chapter 13 case, this stops BOTH the mortgage creditor’s foreclosure AND any present or upcoming tax foreclosure by the county (or applicable taxing authority). The homeowner’s Chapter 13 plan shows how the back payments to both the creditor and the taxing authority will be paid. The protection given to the homeowner by the “automatic stay” against the taxing authority also protects the mortgage creditor by preventing the tax foreclosure of its collateral. This effectively takes from the creditor that justification for taking the home away from the homeowner. The continuous “automatic stay” is the critical element which makes this all work.