Which Types of Debts Can Be Discharged in Chapter 13 but Not in Chapter 7?
Chapter 7 and Chapter 13 are forms of bankruptcy that offer relief from debt in order to gain a fresh financial start. However, there are differences between them that are important to deciding which type of bankruptcy to pursue. Although Chapter 7 generally results in a full debt discharge, there are certain debts that only Chapter 13 can discharge.
Chapter 13 is designed for wage earners who need help with unmanageable debt. It is not full debt forgiveness. It requires paying back a portion of what is owed to unsecured creditors, adhering to a court-approved plan that lasts three to five years. Remaining unsecured debts are discharged once the plan is completed.
In Chapter 7, by contrast, most types of debts are completely wiped out — for example, credit cards, utility bills, personal loans and medical bills — in just a few months. However, in order to qualify for Chapter 7, debtors must pass a means test, demonstrating they have insufficient disposable income to devote to debt repayment.
Some debtors who could qualify for Chapter 7 nevertheless choose to file under Chapter 13. This is because the range of dischargeable debts is wider. The following types of debt not covered by Chapter 7 can be discharged at the end of a Chapter 13 plan:
- Certain governmental charges — Fines, penalties and forfeitures imposed by federal, state or local authorities can be discharged in Chapter 13, even if based on fraudulent conduct.
- Property damage claims — Judgments and other obligations owed for damaging or destroying someone’s property are dischargeable, even if the debtor’s actions were willful and malicious. This only applies to property damage, not to bodily injury.
- Certain divorce or separation obligations — These include debts one spouse has been ordered to pay on behalf of the other, known as indemnification. However, it does not include alimony or child support.
- Nondischargeable tax obligations — These include tax payments that are part of credit card debt.
- Crammed-down or stripped liens— A debtor may be able to reduce (cram down) the amount of a secured debt if the value of the collateral is lower than the loan balance. Also, a junior lien on the property might be removed (stripped). The amounts reduced or stripped are reclassified as unsecured loans and their remaining balances are discharged at the end of the Chapter 13.
There are other advantages to choosing Chapter 13. For one, you can request a plan modification if your financial circumstances change. In addition, you might qualify for a hardship discharge if your failure to complete plan payments is due to circumstances beyond your control, such as an injury or illness that makes it impossible for you to earn enough to fund even a modified plan.
The Law Offices of Michael Jay Berger is one of Southern California’s busiest bankruptcy law firms, with 12 locations in the region. Contact us online or call 310-271-6223 to schedule a free initial consultation.