The discharge of debts is just one of the tools of Chapter 13 for achieving your financial goals. It works differently than in Chapter 7.
Our last blog post was about the permanent write-off—the “discharge”—of debts in a Chapter 7 “straight bankruptcy.” This discharge happens at the end of the case, which is usually only about 4 months after filing.
If you instead file a Chapter 13 “adjustment of debts” case, you also get a discharge of your debts. And it also happens at the end of your case. But with Chapter 13 that’s usually 3 to 5 years after its filing. A Chapter 13 discharge is different a number of ways.
1. Timing of Discharge
Let’s start with this long delay in the discharge.
When filing a Chapter 7 case you usually have two main goals:
- Stop collection activity by your creditors—lawsuits, garnishments, foreclosure, and such.
- Discharge those debts that can be discharged, and do so quickly.
Filing Chapter 13 stops creditor collection activity just as fast and as thoroughly as under Chapter 7. In fact, it’s often better because it’s more effective against certain kinds of debts—such as unpaid child/spousal support. There’s also a co-debtor stay—stopping collections against co-signers—available only under Chapter 13. And with debts that cannot be discharged—such as many tax debts—you can stop the collection actions for years, not just for a few months.
As for the long delay in getting the discharge, that’s usually not much of a practical problem because most of the creditors can’t do anything about it in the meantime. Their debts are stuck in limbo. Since your creditors can’t chase you in the meantime, what does it matter that the discharge doesn’t happen until your Chapter 13 plan has accomplished its objectives?
2. Conditioned on Successful Completion
One problem is that there’s no discharge of your debts at all unless you successfully complete your Chapter 13 case.
That’s also true in Chapter 7. But while it’s quite rare that a Chapter 7 case isn’t completed, it’s much more common with Chapter 13 cases. There’s just so much more that can go wrong in a Chapter 13 payment plan. And there’s so much more time for things to go sideways.
So as you consider filing a Chapter 13 case, know that you have to see it through to the end.
3. Discharge after Partial Payment of Debts
Under Chapter 7 most debts are either discharged completely or they are not discharged at all. Most debts are discharged completely. Certain exceptional ones, like recent income taxes and child/spousal support, are not. You may also voluntarily choose to exclude a debt or two from discharge to keep the collateral, such as with a vehicle loan.
In contrast, under Chapter 13 you must pay as much of your debts as you’re able over a 3-to-5-year period. This usually means you pay something on most or all of your debts. Then you get a discharge of the remaining portions at the end of your case.
But the portion of the debts that you pay during the case can be quite small. In many Chapter 13 cases most of the debtor’s disposable income would go towards special debts. The payment plans usually focus on dealing with secured and “priority” debts. You’re catching up on a major home mortgage arrearage or doing a “cramdown” on a vehicle loan. Or you’re getting current on back child support or paying a big chunk of income taxes. The rest of your debts only get what money is left over, which is often just a small percentage of what you owe. So at the end of the case you’re discharging most of what you owed on most of your debts.
Sometimes your payments plan dedicates ALL of your disposable income on special debts. So you pay nothing at all on the rest of your debts. These debts are just kept on hold during the course of your case, they receive nothing from you, and their entire balances are discharged at the end of the case.
Decades ago Chapter 13 used to discharge a number of categories of debts that Chapter 7 didn’t discharge at all. Over the years Congress whittled away those Chapter 13 “super-discharge” powers.
Now there is only one primary one remaining—divorce property settlements and decrees. That’s the part of the divorce that divides up the marital assets and debts. So, your obligation to give your ex-spouse certain assets or to pay certain debts cannot be discharged under Chapter 7. But it can be in a Chapter 13 case.
Chapter 7 and Chapter 13 both end with a discharge of debts. But as you can see these discharges play out quite differently, reflecting the differences in these two bankruptcy options.