When people want to reorganize debt rather than selling assets to repay creditors, they file for Chapter 13 bankruptcy. A repayment plan is established to gradually eliminate certain types of debt. When considering whether Chapter 13 is the correct type of bankruptcy, it is important to understand what types of debt can be eliminated and it is important to speak with a bankruptcy attorney.
Only an individual can file for Chapter 13 and the person must prove enough disposable income to repay debts. Income must be reduced by secured debts like a mortgage and car loan, plus certain permitted expenses, before determining whether enough remains to cover the bankruptcy payment plan. Under Chapter 13, certain debts like student loans must be repaid in full.
When a Chapter 13 bankruptcy is discharged, most debts are written off. Chapter 13 wipes out more debts than Chapter 7 bankruptcy. The amount of debt paid through the repayment plan depends on income, expenses, and the debts themselves. Nonpriority, unsecured debts typically are not paid in full and some are not paid at all.
Nonpriority, unsecured debt that will be discharged includes credit card debt and medical bills. Personal loans are dischargeable but if an asset was submitted as collateral for the loan, the creditor may repossess this if payment is not made. Though most tax obligations are not dischargeable, older income tax obligations and certain other taxes may be discharged if you filed your tax returns in a timely manner and did not commit fraud. Some mortgage debt may be dischargeable through Chapter 13 bankruptcy.
If you committed a negligent act or breached a contract and this resulted in a judgment, you can usually discharge the related debt through Chapter 13. However, if the act resulted in malicious or willful injury to someone, the associated debt will not be discharged. Chapter 13 discharges several debts that Chapter 7 does not including debts incurred when paying nondischargeable taxes, willful and malicious property damage, and certain debts arising from property settlement during separation or divorce.
Under certain conditions, a junior lien may be stripped and a secured debt may be crammed down and discharged using Chapter 13. When a secured loan is crammed down, the value of the collateral is paid to the creditor and the debt that remains is recategorized as unsecured and subsequently discharged through Chapter 13. Depending on the debts you have, Chapter 13 may or may not be the best way to erase debt and get back on track, only a bankruptcy attorney can properly review your situation.