Sometimes simpler is not better. Sometimes cheaper is more expensive in the long run. Those thoughts occurred to me after meeting with a new client regarding her financial problems. The client, a 61-year-old single women earning $14 per hour, was struggling to pay $9,000 of credit cards. Her income had declined after a change in jobs and there was simply not enough money left over to pay the credit cards after paying the mortgage, utilities, the car payment and a home equity loan she obtained to pay off previous credit card balances.
On the surface, this was an easy Chapter 7 case. I say that because she was well below the Nebraska median income level of $40,429 and she had no unprotected assets. To file Chapter 7 a person’s income cannot be too high and they can protect only so many assets. This client had no problems with either of these issues and I believe most attorneys would have recommended that she file Chapter 7 to alleviate the monthly credit card payments.
this client did not belong in a Chapter 7 case and the cheapest attorney hired would probably be the most expensive choice in the long run
Some clients may have elected to file their own case based on these factors to save themselves the cost of hiring an attorney, and since this is an easy Chapter 7 the only real difference in the attorney chosen would be the price they would charge. The only problem with this view is that this client did not belong in a Chapter 7 case and the cheapest attorney hired would probably be the most expensive choice in the long run.
My recommendation is that the client file Chapter 13. I make this recommendation based on the following facts:
Chapter 13 Lien Stripping: The client owned a home worth $86,000 that was subject to a mortgage loan of $96,000 and a Home Equity Line of Credit (i.e., a second mortgage) of $8,500. By filing Chapter 13 the client would be able to strip the home equity loan. Lien Stripping is a procedure to discharge and remove a second mortgage through the bankruptcy process, and that option is not available in Chapter 7. So, filing Chapter 13 removes an additional $8,500 debt.
Chapter 13 Cramdown: The client owed $18,000 for a truck purchased in 2007, and the value of the truck today was only $12,000. Chapter 13 allows a debtor to pay only what the vehicle is worth today if the vehicle was purchased more than 910 days (about 2.5 years) prior to the bankruptcy. In addition, Chapter 13 allows a debtor to pay a lower interest rate on the vehicle loan of 5.25%. In this case, the monthly bankruptcy payment would be less than what the client was currently paying on the truck loan each month.
As you can see, Chapter 13 saves the client an additional $8,500 on the home equity loan and $6,000 on the vehicle loan plus all the associated interest savings. Although Chapter 7 is faster (cases are completed in about 90 days) and cheaper in the short run, a 3 to 5 year Chapter 13 is clearly the better option in this case. Sometimes simpler is not better. Sometimes cheaper is more expensive in the long run.