Discharge of debts in Chapters 7 and 13; important differences you should know

Through a Chapter 13 payment plan, a debtor may discharge multiple types of debt that cannot be discharged in a Chapter 7 bankruptcy (a liquidation). Thus, if you qualify for a Chapter 13 bankruptcy, and your debts would be nondischargeable in a Chapter 7, Chapter 13 may be a better option. The most common debts that can be discharged in Chapter 13 bankruptcy, but not in a Chapter 7 bankruptcy include:

  1. Debts arising out of willful and maliciously property damage: If a court finds you willfully or maliciously damaged another person’s property, the resulting debt cannot be discharged in a Chapter 7 bankruptcy. But you can discharge debts related to willful and malicious property damage in Chapter 13 bankruptcy. Willful or malicious acts that cause personal injury or death cannot be discharged in either a Chapter 7 or Chapter 13 bankruptcy.
  2. Tax Obligations: If you incur a debt to pay off nondischargeable tax obligations (such as paying your tax liability with a credit card), you can discharge that debt in Chapter 13 bankruptcy, but not in Chapter 7.
  3. Certain debts incurred in divorce or separation proceedings: Domestic support obligations, such as alimony or child support, cannot be discharged in either a Chapter 7 or a Chapter 13 case. However, other types of debts to your spouse, former spouse, or child through a divorce decree, property settlement, separation agreement, or other related proceeding, can be discharged in a Chapter 13 bankruptcy. Such dischargeable obligations typically include debts assigned to you in the course of divorce or separation proceedings (e.g., obligation to pay off a joint credit card debt).
  4. Certain fines and penalties owed to the government: Other than criminal fines, fines and penalties payable to the government are generally dischargeable in a Chapter 13 bankruptcy. In contrast, a Chapter 7 bankruptcy will not discharge most government fines and penalties.
  5. Debts denied discharge in a prior bankruptcy: If you filed for bankruptcy previously and the court denied your discharge, you can’t eliminate those same debts in a subsequent Chapter 7 bankruptcy. However, you may be able to discharge those in Chapter 13.  
  6. Loans against your retirement account: A loan against your retirement account can be dischargeable in Chapter 13 bankruptcy, but not in Chapter 7 bankruptcy. There are, however, reasons to keep repaying such loans in a Chapter 13 bankruptcy. The amount you are required to pay under Chapter 13 plan depends upon the amount of your disposable income. Repaying a loan against your retirement funds reduces the amount of your disposable income, so it often makes sense to keep repaying that loan because the payments benefit you while reducing the amount you are required to pay other creditors.

The above are just some of the factors to consider when deciding whether a Chapter 13 bankruptcy makes sense for you. Feel free to contact our office for a free consultation to further discuss whether a Chapter 13 bankruptcy is right for you.

For More Information