Are There Any Debts That Cannot Be Discharged In A Chapter 13 Bankruptcy?
Some debts are not dischargeable in chapter 13, and if they aren’t paid in full through the chapter 13 plan, then after the plan, the debtor owes the unpaid portion. You get credit for the amount you’ve paid through the plan but the unpaid portion you will owe upon completing the plan. Other debts are dischargeable in Chapter 13, meaning that you pay what you can afford on those debts, and the unpaid portion is discharged when you receive your discharge.
1. Nondischargeable v. Dischargeable Debts In Chapter 13
The list of nondischargeable debts in Chapter 13 is similar, but shorter than, the list of nondischargeable debts in Chapter 7. Here are some examples:
A. Nondischargeable Debts
Student loan debt is nondischargeable. Therefore, if the student loan debt was not paid in full through the plan, the debtor is liable for the unpaid portion after receiving the discharge.
Most tax debt is nondischargeable, and must be paid in full over the life of the plan, unless the taxing authority consents to different treatment.
Obligations to pay child support or alimony — generically referred to as domestic support — are nondischargeable.
B. Dischargeable Unless The Creditor Successfully Challenges Dischargeability
Three types of debt that are dischargeable unless the creditor successfully challenges their discharge are: (a) debts incurred through fraud, (b) debts that are the result of a breach of a fiduciary, including embezzlement and larceny, and (c) debts that are the result of doing willful and malicious harm to a person. The process for challenging the discharge of such a debt involves a full-blown lawsuit called an adversary proceeding, so the dollar amount must be large enough to make the challenge worthwhile to the creditor.
C. Dischargeable In Chapter 13, But Not In Chapter 7
A debt that is the result of doing will and malicious harm to property is dischargeable in Chapter 13, but not in Chapter 7.
A debt to a spouse, former spouse, or child of the debtor that is not domestic support, and was incurred as part of a separation agreement or divorce is dischargeable in Chapter 13, but not in Chapter 7.
A debt that is a fine or penalty is dischargeable in Chapter 13, unless it is for restitution or is a criminal penalty. Such debts are not dischargeable in Chapter 7.
A debt that was not discharged in a prior case can be discharged in Chapter 13, unless it is of the kind that is never dischargeable in Chapter 13. Such debts are not dischargeable in Chapter 7.
A debt that is incurred to pay a tax is dischargeable in Chapter 13, but not in Chapter 7.
Postpetition HOA dues are dischargeable in Chapter 13, but not in Chapter 7.
2. The Hardship Discharge Exception
The shortened list of nondischargeable debts applies in a Chapter 13 case where the debtor completes the plan and receives a discharge under section 1328(a) of the Bankruptcy Code. However, some debtors receive what is referred to as a hardship discharge under section 1328(b), without completing the plan. This happens when, after the Judge has confirmed the plan, the debtor has a material change of circumstances that makes continuing in the plan impossible. The list of nondischargeable debts in a hardship discharge is exactly the same as in Chapter 7.
3. Why Should I Choose A Chapter 13 Bankruptcy?
Many people turn to chapter 13 bankruptcy if they are ineligible for Chapter 7 relief due to high income, and do not want to do a Chapter 11 due to its complexity and concomitant cost. However, the Bankruptcy Code has two debt ceilings in Chapter 13, one for secured debts, the other for unsecured debts. If the debtor exceeds either ceiling Chapter 13 is off the table. In that situation we turn to Chapter 11.
I note in passing that businesses are not eligible to file under Chapter 13. Only individuals and legally married couples can get Chapter 13 relief.
A. Curing A Mortgage Arrearage
On the one hand, suppose you are facing a foreclosure sale, and you file a Chapter 7. Although you’ll get a temporary respite because of the automatic stay, you’re probably going to lose the house because the mortgagee will seek relief from the stay, and proceed with the foreclosure sale once the Judge grants relief from the stay. Since there is no plan of reorganization in Chapter 7, you have no way to cure the mortgage default.
On the other hand, Chapter 13 affords the option of catching up by using the plan to cure the arrearage over a five-year period. If you can cure the arrearage, you can keep the house.
However, you must have sufficient income to: (a) cover all postpetition mortgage payments as they come due, and (b) make plan payments that are large enough to cure the arrearage over the five years.
Therefore, one of the first questions I ask a potential client who wishes to use Chapter 13 to save the house is, “What’s changed?” If the person tells me that the arrearage was the result of a job loss that is no longer a problem because of the new job, great. If the new income is high enough, we can save the house. However, if there hasn’t been an increase in income that is enough to make every mortgage payment that comes due after filing, PLUS make every Chapter 13 plan payment is it comes due, then Chapter 13 will not solve the problem.
In sum, while Chapter 13 is a powerful tool, it will not miraculously give you more income.
B. Chapter 13’s Super Discharge
As discussed above, some debts that are nondischargeable in Chapter 7 are dischargeable in Chapter 13. Therefore, if you have some of those types of debts, Chapter 13 may be the best choice.
C. No Loss Of Assets
In Chapter 7 there is always the possibility of losing assets. You get to keep the exempt assets, but you lose the nonexempt assets to the depredations of the Chapter 7 Trustee. In Chapter 13 you keep all assets — both exempt and nonexempt — because you are paying your creditors through the plan. However, the value of your nonexempt assets is the least that you must pay your unsecured nonpriority creditors.
For more information on Chapter 13 Bankruptcy In California, an initial consultation is your best next step. Get the information and legal answers you are seeking by calling (562) 777-9159 today.
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