Debts that Remain After a Chapter 13 Discharge
Obtaining a discharge in Chapter 13 bankruptcy will not eliminate all debts. Exceptions to a Chapter 13 discharge include, generally:
- Claims for child support and spousal support (/alimony);
- Educational loans;
- Drunk driving liabilities;
- Criminal fines and restitution obligations;
- Certain long-term obligations, such as home mortgages, that extend beyond the term of the plan; and
- Any debts not provided for in a wage-earner plan.
More on these exceptions to the Chapter 13 discharge follows below. For additional information, see Exempt Property in a Chapter 13 Bankruptcy; The Chapter 13 Debt Discharge; and What are a Debtor's Obligations Under Chapter 13?
Spousal and Child Support
The effect of a discharge on child and spousal support obligations varies somewhat depending on whether the debtor filed a Chapter 7 or a Chapter 13 bankruptcy. Whereas a Chapter 7 filing will have little effect on such obligations, a Chapter 13 proceeding may stop the collection activities, at least temporarily. The difference between chapters arises because, although all bankruptcies stop or "stay" creditors' efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the "property of the estate," and the different chapters of the Code define this term differently.
Under Chapter 13, the Bankruptcy Code considers the debtor's earnings as property of the estate, since the 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. The court can decide to remove the stay to allow for withholding alimony and child support from the debtor's income. Whether it does so may depend on how well the wage-earner plan provides for child and spousal support. If the plan does not, in the court's opinion, include adequate provisions, it may decide to lift the stay.
In any event, the 2005 revision to the Bankruptcy Code made the collection of domestic support obligations a much higher priority. Domestic support obligations are now specifically excepted from discharge. A Chapter 13 case may be dismissed if the debtor fails to pay any domestic support obligation that becomes payable after the filing of the petition. Domestic support obligations that are assigned to a governmental unit may be paid less than 100% but only if disposable income is dedicated to the plan for a full five years. The gist of the change is that a Chapter 13 debtor must certify the payment in full of domestic support obligations or that the confirmed plan provides for payment of pre-bankruptcy domestic support obligations. Also, the priority of domestic support obligations was moved to the top of the list of priorities, and the preference provisions were amended to protect domestic support transfers from avoidance.
A Chapter 13 discharge does not affect post-discharge child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.
As noted above, educational loans guaranteed by the United States government are also generally not discharged by a Chapter 13 bankruptcy. They 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. In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor's other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they 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 financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and
- Good Faith -- the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
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Handling debt involves many important and delicate decisions. If you understand your rights you can get out from under your debt burden while still preserving some important assets, while the wrong decisions can leave you with nothing and still owing an unmanageable amount. Contact a local attorney for a free initial case assessment to discuss the best plan to return you to solvency.