How Can Chapter 13 Help Me With Nondischargeable Debts?

By Cara O'Neill, Attorney
When you’re behind on your nondischargeable debt payments, such as income taxes, student loans, or past-due house payments, filing Chapter 13 can help get you back on track.

Some stubborn bills—called nondischargeable debts—don’t go away in bankruptcy, which isn’t good news if your student loans are in default, the tax man is knocking at your door, or you need to catch up on your mortgage before you lose the house. Even so, bankruptcy can still help ease your financial situation. While it won’t wipe out nondischargeable debts, Chapter 13 bankruptcy stops collection actions, allows you to bring past-due bills current, and gives you time to pay your debts off for good.

What Is a Chapter 13 Bankruptcy?

Often called “reorganization,” Chapter 13 restructures your debt into a three- or five-year payment plan. Unlike with Chapter 7 bankruptcy, you don’t have to worry about giving up any of your property. To qualify, you must prove that after you pay your household expenses, you will have enough money left over, called “discretionary income,” with which to make your monthly bankruptcy plan payments.

What Types of Debts Are Nondischargeable?

Here are examples of common nondischargeable debts:

  • student loans
  • income taxes
  • certain property taxes
  • pension or retirement plan loans
  • domestic support obligations (child support and spousal support)
  • penalties and fines owed to the government
  • secured loans (such as a car and house payment, unless the owner gives the property back)
  • debts resulting from fraud
  • certain condominium or homeowners' association dues and fees
  • debts resulting from willful and malicious infliction of injury
  • loans owed to pension or retirement plans, and
  • money owed as a result of inflicting wrongful death or personal injury upon another person when operating a vehicle while under the influence of alcohol or drugs.

You might qualify for an exception that allows you to discharge debt that’s normally not dischargeable. Before filing Chapter 13, it’s a good idea to speak with an attorney to find out about all of your options.

Repaying Your Nondischargeable Debt Over Time

It’s common to want to bury your head in the sand when you can’t pay your bills. But the result is always the same—the longer the bills go unpaid, the more aggressive the creditors become. Before you know it, a creditor may have drained your bank account (called a bank levy), in which case you can no longer pay your rent. Or, your employer may hand you a notice informing you that your paycheck will be 25% lighter each month (due to a creditor having arranged for a wage garnishment).

Chapter 13 immediately stops these types of collection activities and provides you with time to put together a plan to take care of your shaky financial situation. Here are examples of the benefits of filing:

  • Your creditors must stop collecting from you.
  • Your creditors can’t sue you, garnish your wages, levy your bank accounts, or pursue other collection activities.
  • Interest and late penalties on your debts stop accruing in some cases.
  • You can catch up on missed car and mortgage payments.
  • You can lower your monthly payments on dischargeable debts, such as credit cards, personal loans, and medical bills.
  • You can pay off nondischargeable debt, such as income taxes, over the following three or five years.

Dealing With the Chapter 13 Obligation to Pay Nondischargeable Debt In Full

The tricky part of Chapter 13 is that you must fully pay off the balance of your nondischargeable debt over the course of your three- to five-year repayment plan (unless it’s considered long-term debt, such as a mortgage or student loan). While this rule doesn’t pose a problem for most people, if you have a large tax debt, or you’re substantially behind on your mortgage payments, you might end up having to repay a high amount each month under your repayment plan.

For example, if you owe $10,000, your monthly payment will be approximately $167 for five years (plus bankruptcy trustee fees). If you owe $70,000, it will be closer to $1,167 per month—or about $1,000 more. And this is in addition to your monthly household expenses, such as your rent or mortgage payment.

Questions for Your Attorney

  • How soon will my wage garnishment stop after I file Chapter 13?
  • Do I qualify for an exception that will allow me to wipe out nondischargeable debt?
  • If I file Chapter 13, will I have a large monthly payment?
  • How much will the bankruptcy trustee charge me each month in my case?
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