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Chapter 7 or Chapter 13 are the types of bankruptcy consumers typically use to get rid of unsecured debt such as credit card debt. However, both types of bankruptcy have potentially important differences with respect to what types of debt get discharged. A discharge is the final order from the bankruptcy court eliminating the filer’s obligation to pay their debts. Continue reading to learn more about the differences between a discharge in a Chapter 7 bankruptcy and Chapter 13 bankruptcy.
Chapter 7 Bankruptcy versus Chapter 13 Bankruptcy
To qualify for a Chapter 7, you must pass the Means Test and not have disposable income available, otherwise, you would need to file for Chapter 13. A Chapter 13 bankruptcy is a repayment plan with the court that lasts between 36 to 60 months and requires regular income. Once you complete your plan, you will receive a Chapter 13 discharge. How a Chapter 13 plan is calculated depends on several factors including your income, expenses, the value of your assets and the district you live in. Nonexempt property is property that isn’t protected by a bankruptcy exemption. Bankruptcy exemptions and the amount that can be claimed depends on the state you reside in.
Filing bankruptcy results in an automatic stay which means pending lawsuits such as a collection action or garnishment must stop. For example, if you’re behind on mortgage payments or car loans, filing for bankruptcy would stop a foreclosure or a car repossession. One advantage of the Chapter 13 process is that if you want to keep your house or car, a portion of your monthly payment of the Chapter 13 plan can be applied to the arrears, the amount you fell behind on. That’s not possible with a Chapter 7. However, note that the automatic stay is a temporary solution as a court order from the bankruptcy judge could terminate it. The automatic stay also ends when the bankruptcy discharge is approved.
Because Chapter 13 allows you to discharge more debts than a Chapter 7, it's known as a "super discharge." In addition to discharging debt that can’t be eliminated in a Chapter 7, Chapter 13 has other advantages. For example, a Chapter 13 can "strip" or remove a second mortgage from your property if you owe more on your home than it’s worth. A Chapter 13 also allows for a “cram down” of your car. This means that if you owe more on your car than what it’s worth, the balance of your car loan will be reduced to the value of your car.
Continue reading to learn the different debts that are dischargeable with a Chapter 13 as compared to a Chapter 7 bankruptcy case.↑ Back to top
The Chapter 13 Super Discharge
With a Chapter 13, some debts can be discharged that can’t with a Chapter 7. Even for debts that can’t be discharged with either type of bankruptcy, a Chapter 13 can still work to your advantage when a Chapter 7 can’t. Since you will need to list all your debts in a bankruptcy, make sure to review your credit report to obtain balances and updated contact information for creditors.↑ Back to top
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Chapter 13 Dischargeable Debts Versus Chapter 7 Debts
Debts that can be discharged with a Chapter 13 bankruptcy but not a Chapter 7 includes homeowner association fees (HOA) that came due after you filed for bankruptcy. Civil fines and penalties such as for traffic and parking tickets can also be included in a Chapter 13, but not Chapter 7. Divorce property settlements can be discharged in a Chapter 13, but not if it’s related to a domestic support obligation such as alimony and child support. And, unlike in a Chapter 7, you’re able to discharge debt incurred to pay otherwise nondischargeable tax obligations. For example, if you got a personal loan or used credit cards to pay off nondischargeable taxes, this debt can be discharged in a Chapter 13 case, but not in a bankruptcy case under Chapter 7 of the Bankruptcy Code.↑ Back to top
Debts That Can’t Be Discharged with Bankruptcy
While there are some debts that can’t be discharged whether with a Chapter 7 or Chapter 13 bankruptcy, it could still be to your advantage to file for Chapter 13.
For example, even though you can’t eliminate alimony and child support obligations by filing bankruptcy, if you’ve fallen behind on your child support and/or alimony payments, your ex-spouse can take you back to court to collect on the past due amount. With a Chapter 13, you can include the arrears in the repayment plan which will likely be a lower monthly amount than you would’ve paid in family court. However, you still need to keep your current monthly payments up to date.
Student loans can’t be discharged in a bankruptcy, but you may be able to reduce the monthly payment with the lender because of your Chapter 13, or delay making payments until you receive a discharge. However, interest will continue to accrue during this time.
Recent income taxes aren’t dischargeable either, but a Chapter 13 will help extend the time period in which to make payments. This is important when you can’t reach an agreement with the Internal Revenue Service (IRS) and the taxes are due immediately or the IRS wants a monthly amount you can’t afford. The Chapter 13 will result in paying an amount you can afford through the bankruptcy plan. Also, any lawsuit filed by the government to collect taxes will stop because of the automatic stay.The automatic stay will even protect a co-signer. In a Chapter 7, once the bankruptcy discharge is issued, a creditor can continue collection efforts against a co-signer. With a Chapter 13, the automatic stay protects the co-signer throughout the bankruptcy process which could last between 3 to 5 years.↑ Back to top
Even though the Chapter 13 plan is between 3 to 5 years, there are some very limited circumstances in which you can receive a discharge before you completed your plan. This is known as a hardship discharge.
To qualify for a hardship discharge, you must prove to the bankruptcy court that due to circumstances beyond your control, you can’t complete the bankruptcy plan. That’s important because voluntary acts don’t count as “beyond your control.” However, prolonged illness, death of a family member that contributed to the bankruptcy plan, permanent disability, even a decrease in monthly income due to long periods of unemployment can be some of the circumstances that could qualify as a hardship discharge. However, showing a hardship is just step one.
At the time of requesting a hardship discharge, creditors must have received at least as much as they would have in a Chapter 7. This is known as the “best interests of the creditor’s test.” For example, if there was $5,000 in nonexempt equity if you filed for Chapter 7, the creditors would’ve had to receive their portion of the same amount in Chapter 13. That’s to make sure that your creditors can’t be worse off than they would have been in a Chapter 7 simply because you filed Chapter 13. Also, if it’s possible to modify your plan by lowering the monthly payments, then you may not qualify for a hardship discharge. However, it’s still possible to convert from a Chapter 13 to a Chapter 7.
While a hardship discharge won’t get rid of all debts typically eliminated by a Chapter 13 discharge, it will discharge the same debts that could have been included in a Chapter 7.↑ Back to top
If you have debts that can’t be discharged in a Chapter 7, consider filing a Chapter 13 to eliminate these debts instead. Once you receive your Chapter 13 discharge, you will be debt free. If you need to speak with a bankruptcy attorney, Upsolve can also provide you with a referral.↑ Back to top