Bankruptcy allows a debtor to obtain relief from his creditors if he meets certain legal requirements. Chapter 7 bankruptcy is a liquidation of assets, while Chapter 13 bankruptcy involves repayment of some, or all, of the debt owed. If a debtor’s income is above the state median income and he has enough disposable income to repay his debt, Chapter 7 is not an option. In both types of bankruptcy, there eventually is a discharge of debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows a debtor with a regular income to create a repayment plan to repay his debts over a three- to five- year period. Filing this type of bankruptcy does not require liquidation of the debtor’s assets to pay creditors. Chapter 13 gives a debtor the opportunity to prevent foreclosure of his home. By filing under this chapter, a debtor can stop foreclosure proceedings and repay delinquent mortgage payments over time.
In Chapter 13 bankruptcy, a discharge means that the debtor is released from debts addressed in his repayment plan and no longer has responsibility to pay those debts. After discharge, creditors included in his Chapter 13 repayment plan, can no longer pursue the debtor to solicit payments for discharged debts.
Obtaining a Discharge
To qualify for discharge, once the debtor completes his Chapter 13 repayment plan, he must certify that he is current on his domestic support obligations if he has any, as well as certify that he has not received a discharge in a prior Chapter 13 case within two years, or a prior Chapter 7 case within four years. He must also certify that he has completed a financial management course. Once the debtor makes these certifications to the court, the court provides notice to interested parties and holds a hearing on the discharge. If the court determines there is no reason to believe there is pending legal action that might limit the debtor’s homestead exemption -- which is the amount of equity the debtor is allowed to retain in his home -- it can then grant the discharge.
Types of Debts
A Chapter 13 discharge releases the debtor from the debts included in the repayment plan, which typically include credit card debt, vehicle loans, and other types of consumer debt. Debts dischargeable in a Chapter 13, but not in Chapter 7 bankruptcy include debts for willful injury to property, debts incurred to pay nondischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings. However, some debts are not dischargeable, such as certain long-term debts like mortgages, alimony or child support, some taxes, student loan debt, government benefit overpayments, some debts caused by driving under the influence of alcohol or drugs, and restitution or fines from a criminal case. Some other debts – such as debts for fraudulent activity – may not be discharged if the creditor files an action to have the debt declared nondischargeable.
Sometimes, a debtor cannot complete his entire repayment plan due to circumstances beyond his control, such as long-term illness or injury. In such cases, the debtor can ask the court to grant a hardship discharge, thereby removing the requirement that the debtor complete the repayment plan before he receives his discharge. A hardship discharge is only available if the circumstances are beyond the debtor’s control, creditors have received at least as much as they would have received if the debtor had filed Chapter 7, and there is no way to modify the plan to allow the debtor to continue repayment under his new circumstances.