What’s Different about the Discharge of Your Debts under Chapter 13?

Posted by Kevin on June 1, 2012 under Bankruptcy Blog | Be the First to Comment

Sometimes choosing between Chapter 7 and 13 is easy, but other times it means carefully weighing lots of considerations.  Whether the choice is easy or hard, one of those considerations is how these two options compare in their discharge (legal write-off) of your debts.

The good news in favor of Chapter 13 is that it discharges a couple more types of debts than Chapter 7 does. So in the right case this “super discharge” could be reason enough to choose Chapter 13.

The bad news is about timing—the discharge is not effective until the very end of a Chapter 13 case—usually 3 to 5 years after it is filed. That means you have to successfully complete the case to get a discharge of your debts.  In other words, you need to make all payments under the plan before you get the discharge.  The fact is that a significant percentage of Chapter 13 cases are not successfully completed.  If the case is converted to Chapter 7, the debtor is still eligible for for less inclusive Chapter 7 discharge.  If the Chapter 13 is dismissed, however, the debts are still owed. That’s a risk that needs to be seriously considered before filing a Chapter 13 case.

The Mini “Super Discharge”

In the past, one way that Congress encouraged debtors to file Chapter 13s is by allowing various kinds of debts to be discharged under Chapter 13 that could not be discharged under Chapter 7. Chapter 13 was said to provide a “super discharge.” But over the last quarter-century or so, Congress has whittled away at the list of debts treated more favorably under Chapter 13 until now only two noteworthy ones remain:

1. You can discharge non-support obligations owed to an ex-spouse in a Chapter 13 case (and not in a Chapter 7 one). These obligations usually include those in a divorce decree requiring you to pay off a joint marital debt or to pay the ex-spouse to compensate for you receiving more than your share of the marital property. They are often called the “property settlement” part of your divorce.

2. An obligation arising from a “willful and malicious” injury that you are accused of causing to a person or to property can be discharged in Chapter 13. This refers to allegations that you hurt somebody or their property not merely through your negligence—which would be discharged in Chapter 7—but instead either intentionally or recklessly—the discharge of which could be challenged in a Chapter 7 case.

These are both very delicate areas. What’s a “property settlement” type of divorce obligation instead of a support obligation, and what’s a “willful and malicious” injury instead just of a negligent one—these are often not straightforward distinctions. The decision to use Chapter 13 to undo part of a divorce decree or to escape accusations of “willful and malicious” injury can have a variety of  considerations.  Moreover, if substantial amounts of money are involved, it is likely that the ex-spouse or victim of injury will file an action within the bankruptcy to challenge the discharge.  This will add to the expense and complexity of the case.

As a practical matter, a prospective debtor and his or her attorney must carefully analyze the debtor’s situation to determine not only whether the debtor can make the payments under a Chapter 13 plan but whether the benefits of Chapter 13 outweigh the potential pitfalls.

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