Crucial Question: Does It Take Years to Get Rid of Your Debts under Chapter 13?
Yes, the “discharge”—write-off—of your debts does not happen until the end of your 3-to-5-year case. Thus there are some resulting risks.
During the last month of blog posts we’ve answer some key questions about Chapter 13. In doing so, we have showcased many of Chapter 13’s special benefits in dealing with your debts, especially those debts that Chapter 7 “straight bankruptcy” does not handle so well. But we’ve also made clear that one of the main detriments of using Chapter 13 is that a successful one takes at least 3 years and as long as 5 years to complete. That’s a lot longer than a Chapter 7 case, which is usually finished in a mere three months or so.
The Role of “Discharge” in Chapter 7 vs. 13
The main benefit of a Chapter 7 case is the discharge of debts. You get a fresh financial start by not having to pay all or most of your debts.
But under Chapter 13 there can be many other benefits, many of them related to certain particular kinds of otherwise troublesome debts. For example:
- You can often get years to catch up on a home mortgage if you fall thousands of dollars in arrears.
- Through “cramdown” you may be able to greatly lower your vehicle payment and the total you pay to get it free and clear.
- Through lien stripping you may be able to get rid of a second mortgage.
- You can stop collection of back child or spousal support and be given years to catch up.
- You can get rid of non-support divorce obligations, often by paying little or nothing extra.
- With income taxes which can’t be discharged over time, you can pay them off on terms based on your budget, without any further interest and tax penalties, while being protected from the IRS/state.
However, the discharge of debts is still a crucial part of Chapter 13. In most Chapter 13 cases, many or most of your creditors are paid only a portion of the amount owed. Often that portion is quite a small percentage of the amount owed, and sometimes it’s even 0%. The remaining amount—the part the court-approved Chapter 13 payment plan says does not need to be paid—is discharged. But that discharge happens only at the very end, at the successful completion of the payment plan.
Consider This Risk at the Beginning of Your Case
As you make the decision about whether you should file a Chapter 13 case and get its benefits, consider directly the possibility that at some point you would not be able to make the required plan payments. Be realistic about how reliably you’ll be able to make those payments for as long as the case is projected to last.
Also, be sure to understand what your options would be if your circumstances were to change. In other words, as you assess the potential benefits and detriments of filing a Chapter 13 case, and as you consider the risk that your income and/or your expenses would change during the course of the case, be aware what steps you could then take to still have a successful outcome.
Options If Your Circumstances Change
Here are your main options:
1) Amended Plan: If during your Chapter 13 case your income is unexpectedly reduced, or your expenses are significantly increased, you can usually make a formal change in the amount of your monthly plan payments (and the other terms of your plan).
2) “Hardship” Discharges: Under certain limited circumstances of outside-your-control financial hardship, you can end your Chapter 13 case early and still get a discharge of your debts, or at least most of them. You may at that time lose out on some of the intended benefits of the case, but you may not need them any more at that point.
3) “Conversion” to Chapter 7: You can at virtually any time change your Chapter 13 case into a Chapter 7 one (as long as you qualify to be in one), and thus get the benefit of a quick discharge of all or most of your debts. Again, at that point you’d lose out on the Chapter 13 benefit(s) you wanted when you filed the case, but your circumstances at that time would likely make that no longer important or attainable.
4) “Dismissal”: You can almost always get out of your Chapter 13 case altogether, in literally a matter of hours. That would also immediately end the protection from your creditors that the case gave you. So this is not often used, and when it is it’s mostly a tactic to get out of one case to start another.
5) “Severing” Joint Cases: As we discussed a few days ago, if you file a joint Chapter 13 case with your spouse, you can later (especially if you’re getting divorced) separate your case into two distinct ones for each person. Then each person can decide which of the options above are best for that person.
So, yes, it does take getting successfully through your Chapter 13 case before your debts are formally discharged. And you have some risks in getting to that point.
But now that you have some idea of the flexibility you continue to have once you file a Chapter 13 case, you can better assess the risk that you would not get a discharge of your debts one way or the other. Remember that you are protected from most creditors’ actions during your case by the ongoing “automatic stay.” And it is important to be proactive during your case if your circumstances do change, so your attorney can help you decide what changes, if any, need to be made and how to execute them.