What Debts Remain After a Chapter 13 Discharge?
A Chapter 13 discharge affects only those debts provided for by the plan. Any debts not scheduled in the plan will remain, and the debtor will have to pay them in full, even after discharge. Furthermore, some types of debt are generally not dischargeable in Chapter 13 such as spousal and child support; many educational loans; some taxes; debts procured by fraud, larceny or embezzlement; money damages from “willful or malicious” physical harm; intoxicated-driving liabilities; certain luxury purchases or cash advances made just before filing for bankruptcy; criminal fines and restitution; and certain long-term obligations, such as home mortgages, that extend beyond the plan’s term.
Spousal and Child Support Under Chapter 13
Our bankruptcy system aggressively protects recipients of domestic-support obligations (DSOs), usually originating in divorce or paternity matters. For the privilege of filing under Chapter 13, a debtor is expected to make ongoing family-support payments. After filing a Chapter 13 petition, if the debtor fails to make alimony or child-support payments as they become due, the case can be dismissed or converted to Chapter 7.
A debtor has to be current in his or her domestic-support payments when the Chapter 13 bankruptcy is over or the court will not order final discharge of dischargeable debts. In certain circumstances payments may be suspended until after the bankruptcy closes when the DSO payments are owed to a governmental unit rather than directly to a family recipient.
Past-due child and spousal-support obligations themselves are not dischargeable debts under Chapter 13, so these legitimate familial obligations survive Chapter 13 bankruptcy, are not extinguished and continue to accrue during and after bankruptcy closure.
The automatic stay of debt collection efforts against the debtor granted by a Chapter 13 filing does not prevent new or continuing legal proceedings to establish or modify domestic-support obligations. However, Chapter 13 differs in one important way from Chapter 7 in the collection of DSOs during the stay.
According to the Bankruptcy Code, DSO collection efforts are not prevented by the automatic stay “from property that is not property of the estate.” In a Chapter 7 liquidation proceeding, “property of the estate” includes all possessions, money and interests the debtor owns at the time he or she files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor’s current, ongoing income, the bankruptcy should have little effect on preventing DSO collection efforts in Chapter 7.
Under Chapter 13, however, the Code considers the debtor’s ongoing earnings when the bankruptcy is open to be property of the estate, since the Chapter 13 wage-earner plan is based on making payments from the debtor’s current income rather than from liquidated assets. As a result, support collections may be stayed under Chapter 13. The courts have interpreted this provision in a variety of ways, sometimes removing the stay to allow for withholding alimony and child support from the debtor’s income. However, the family member attempting to collect a past-due DSO may have to wait until the stay is lifted at the end of the Chapter 13 bankruptcy. If you face a collection issue in a Chapter 13 bankruptcy as either the DSO debtor or as the previous spouse or partner trying to collect a DSO, consult an experienced bankruptcy attorney for counsel about the current state of the law in your jurisdiction.
Student Loans Under Chapter 13
Educational loans guaranteed by the United States government are generally not discharged by either a Chapter 13 or Chapter 7 bankruptcy. Student loans may be dischargeable, however, if the court finds that paying off the loan will impose an undue hardship on the debtor, and his or her dependents. Courts have viewed the undue-hardship exception as a difficult standard to meet; to be an undue hardship the student-loan repayment must not just be uncomfortable or inconvenient, but must really cause a financial crisis. In defining the requirements for granting a hardship discharge of a student loan, courts often apply a three-part test to determine eligibility:
- Income — If the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents.
- Duration — The dire financial circumstances will continue for a significant portion of the loan-repayment period.
- Good Faith — The debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
An experienced bankruptcy attorney at our firm can explain the differences between dischargeable and nondischargeable debts under Chapter 13 and paint a realistic picture of your post-bankruptcy financial situation if Chapter 13 is the way you choose to proceed.
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