Crucial Question: Does a Chapter 13 Case “Discharge” More Debts than a Chapter 7 One?
Yes, but barely. Chapter 13 can deal much better with many kinds of debts, but it can only discharge one kind that Chapter 7 can’t.
What is “Discharge”?
At the successful completion of both a Chapter 7 “straight bankruptcy” and a Chapter 13 “adjustment of debts,” you receive a discharge of your debts. That means that the creditors are legally forbidden to make any further direct or indirect attempts to collect those debts.
That is, you get a discharge of most, but often not all, of your debts. Certain kinds of debts are not discharged. Among these are recent income taxes, back child or spousal support, most student loans, debts incurred through fraud, drunk driving and various others. Other debts you may not want to discharge, especially secured debts in which you want to keep the collateral, such as your home mortgage or vehicle loan.
If all the debts that you want to discharge can be discharged, and you otherwise qualify for Chapter 7, that may be the better option for you. But if you have one or more important debts that you can’t discharge but you need help dealing with, Chapter 13 provides extra tools for doing so. For example, Chapter 13 gives you time to catch up on mortgage or child support arrears, may get rid of a second mortgage, and might reduce both the monthly payments and total debt on a vehicle loan.
So, although a major purpose for filing bankruptcy—often the primary purpose—is to discharge your debts and get a fresh financial start, it can also help you deal with those special debts that are not discharged.
The Debt That Chapter 13 Can Discharge But Chapter 7 Can’t
But still, being able to discharge a debt is a very powerful benefit. And if you have a substantial debt that can’t be discharged under Chapter 7 but can be under Chapter 13, that should make you look very closely at Chapter 13 for that reason alone.
In decades past, Chapter 13 used to be able to discharge more types of debts than it can now. When the current Bankruptcy Code first became law in the late 1970s, there were quite a few types of debts that could be discharged only under Chapter 13. This was done in large part to encourage people to file Chapter 13 and attempt to pay something to their creditors. The debts that could be discharged back then included, for instance, debts incurred through misrepresentation or fraud, and student loans. But over the years since then, Congress has chipped away at these until now only one main one still remains: non-support divorce-based debts.
What Are Non-Support Divorce Debts?
These are obligations usually arising out of a divorce decree addressing the division of marital property or marital debts. They do not include child or spousal support obligations, which can never be discharged, under either Chapter 7 or 13 (although support arrearage is handled much better under Chapter 13).
Non-support obligations are generally stated in your divorce decree in one of two ways:
- as your obligation to pay your ex-spouse directly in return for you having received more than your share of the marital assets (for example, for getting the more expensive of the two vehicles), or
- as your obligation to pay all of what had been a marital debt jointly owed with your ex-spouse.
So let’s say the divorce decree says that you owe your ex-spouse $10,000 directly, and also must pay all of a joint debt of $5,000. In a Chapter 7 case you could not discharge these two obligations. After the case would be over, you would still owe these debts.
However, you could discharge these debts in a Chapter 13 case. Depending on your other circumstances, you may or may not have to pay a portion of this $15,000 of debts. Even if you do, the total amount you would have to pay to your creditors may be no larger as a result of this non-support debt. (That is, you may simply pay that much less to other creditors in order to pay a pro rata share of that $15,000 of non-support debt.) In many cases you’d only pay pennies on the dollar in a Chapter 13 case instead of having to pay those in full otherwise.
At the end of a Chapter 13 case, whatever portion of the $15,000 that was not paid would be discharged, no longer legally owed, regardless what the divorce decree said.