Filing for bankruptcy provides a fresh financial start by wiping out (discharging) debt, such as credit card balances, personal loans, and medical bills. Surprisingly, you can get rid of more debt in a Chapter 13 bankruptcy than in a Chapter 7 bankruptcy. For instance, a debt balance resulting from willful and malicious damage to property, a property settlement in a divorce, or an outstanding traffic ticket will go away after successfully completing a Chapter 13 repayment plan—but not in a Chapter 7 bankruptcy. If you have these types of debts, you’ll remain responsible for them after your Chapter 7 bankruptcy case is over. In this article, you’ll learn more about the debt that you can discharge only in a Chapter 13 bankruptcy.
Debt Discharged Only In a Chapter 13 Bankruptcy
Any debt that you can discharge in a Chapter 7 bankruptcy is dischargeable in a Chapter 13 bankruptcy, too—but Chapter 13 bankruptcy wipes out even more. However, the added discharge power comes at a cost—literally—because you’ll have to pay into a repayment plan for three to five years. As a result, choosing Chapter 13 over Chapter 7 bankruptcy may make sense if you have substantial debts that can be discharged in Chapter 13 bankruptcy but not in Chapter 7 bankruptcy.
Here are examples of common debts that go away only after finishing a Chapter 13 bankruptcy plan.
Debt for Willful and Malicious Injury to Property
You can get rid of your responsibility to pay for property you purposely damaged because Chapter 13 bankruptcy allows you to discharge debt arising from willful and malicious damage to property (but not a willful injury to a person).
Example. Suppose a bar patron had too much to drink and took offense to a man talking on a cellphone. To silence the conversation, the patron hit the man in the jaw, threw his phone on the ground, and stomped on it. In a Chapter 7 bankruptcy, the patron would remain responsible for the man’s hospital bill and cost to repair the damaged phone. In a Chapter 13 bankruptcy, the patron could discharge the cellphone repair bill but would remain liable for the medical bill.
Certain Debt Arising Out of a Divorce or Separation Order or Settlement
Chapter 13 bankruptcy discharges debt you must pay under a family law court order or marital settlement agreement—as long as it isn’t child or spousal support (which are never dischargeable). A typical example would be a “property equalization” payment when one spouse received more property than the other and to compensate for the inequality, the property-rich spouse pays money to the other. You’ll want to check the laws of your state because your court might handle non-support issues differently.
Debt Incurred to Pay Nondischargeable Taxes
In a Chapter 7 bankruptcy, if you paid your tax bill—a nondischargeable debt—with your credit card—a dischargeable debt—you’d remain responsible for the credit card bill after you received your discharge. That’s because you cannot discharge debt that you incurred to pay a nondischargeable debt. By contrast, the credit card bill would be dischargeable in Chapter 13 bankruptcy. However, timing matters. The court might find it fraudulent if you take out a loan to pay taxes immediately before filing for bankruptcy.
Post-Petition Homeowners’ Dues
When you decide to let go of your home or condominium, you remain responsible for the homeowners’ dues until the lender sells the property and title transfers out of your name. In some courts (but not all), you can avoid incurring dues by letting go of your home as a part of your Chapter 13 plan.
Fines, Penalties, and Forfeitures Payable to a Governmental Unit
Debts for fines, penalties, and forfeitures that you owe to a city, county, state, or other governmental agency are dischargeable in Chapter 13 bankruptcy—even if it arises from fraud. You can’t discharge restitution or a criminal fine included as part of a criminal sentencing, however. You’ll have to pay those debts in full.
Debt Previously Included in an Unsuccessful Bankruptcy Case
If you previously filed a bankruptcy case, and the court found that you were not entitled to receive a discharge, or if you waived your discharge, you can get rid of the debt in that previous bankruptcy in a Chapter 13 bankruptcy. It’s important to understand that this applies only to unsuccessful cases, not an individual debt. Once a judge declares a particular debt nondischargeable, it remains nondischargeable in future bankruptcy cases.
Other less common debts that are dischargeable in a Chapter 13 bankruptcy include debt arising from a wrongful act committed against a federally insured bank or credit union; court fees incurred by a prisoner who files a lawsuit, motion, appeal or court document; and debts arising from securities law violations.
If you’re not sure whether you should file for Chapter 7 or Chapter 13 bankruptcy, a local bankruptcy attorney can review your debt and help you decide the best chapter for you.
Questions for Your Attorney
- Am I eligible to file for Chapter 13 bankruptcy?
- Will I pay more in Chapter 13 bankruptcy than what it would cost to pay off the debt after a Chapter 7 bankruptcy?
- Will my creditor object to the discharge of the debt in Chapter 13 bankruptcy?