Bankruptcy allows a debtor to obtain relief from his creditors if he meets certain legal requirements. Chapter 7 bankruptcy is a liquidation of non-exempt assets, while Chapter 13 bankruptcy involves repayment of some, or all, of the debt owed. If a debtor’s income is above the state median income and he has enough disposable income to repay his debt, Chapter 7 is not an option unless his debts are primarily business debts. In both types of bankruptcy, there eventually is a discharge of debt.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy allows a debtor with a regular income to create a repayment plan to repay his debts over a three- to five- year period. Filing this type of bankruptcy does not require liquidation of the debtor’s assets to pay creditors (although the debtor may voluntarily sell assets to pay into the plan). Chapter 13 gives a debtor the opportunity to prevent foreclosure of his home; by filing under this chapter, a debtor can stop foreclosure proceedings and repay delinquent mortgage payments over time. A debtor in Chapter 13 can also pay off a car loan, back property taxes and even IRS debt.
The Chapter 13 Discharge
In Chapter 13 bankruptcy, a discharge means that the debtor is released from liability for debts addressed in his repayment plan and no longer has responsibility to pay those debts. After discharge, creditors included in his Chapter 13 repayment plan can no longer pursue the debtor to solicit payments for discharged debts unless certain exceptions apply.
For instance, the debtor will still have to keep paying her mortgage if she wants to keep her house unless she paid the entire balance during the bankruptcy, and student loan debt is not dischargeable without a court order.
Anyone who is obligated jointly on the debt is not discharged; the discharge is personal to the one who filed. Co-debtors will still be responsible for the debts.
Obtaining a Discharge
To qualify for discharge, once the debtor completes his Chapter 13 repayment plan, he must certify that he is current on his domestic support obligations if he has any, as well as certify that he has not received a discharge in a prior Chapter 13 case within two years, or a prior Chapter 7 case within four years.
He must also certify that he has completed a financial management course. Once the debtor makes these certifications to the court, the court provides notice to interested parties. Once the Chapter 13 trustee confirms that all payments have been made and all funds have been disbursed, and the debtor does what he is supposed to do, the court will enter a discharge order.
Types of Debts
A Chapter 13 discharge releases the debtor from the debts included in the repayment plan, which typically include credit card debt, medical bills, personal loans and other debts that are unsecured (not backed by collateral). If the debtor had secured debts that were not paid in full or paid as modified by the Chapter 13 plan, like a car loan or a mortgage, she must continue to pay that debt to keep the property.
However, some debts are not dischargeable, such as alimony or child support, some taxes, student loan debt, government benefit overpayments, some debts caused by driving under the influence of alcohol or drugs, and restitution or fines from a criminal case. Some other debts – such as debts for fraudulent activity – may not be discharged if the creditor files an action to have the debt declared nondischargeable.
Sometimes, a debtor cannot complete his entire repayment plan due to circumstances beyond his control, such as long-term illness or injury. In such cases, the debtor can ask the court to grant a hardship discharge, thereby removing the requirement that the debtor complete the repayment plan before he receives his discharge.
A hardship discharge is only available if the circumstances are beyond the debtor’s control, creditors have received at least as much as they would have received if the debtor had filed Chapter 7, and there is no way to modify the plan to allow the debtor to continue repayment under his new circumstances.
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