Through liquidation (Chapter 7) or reorganization (Chapter 11), bankruptcy provides individuals who are overburdened by debt with a chance to start over (Chapter 13). In both instances, the bankruptcy court can discharge debts. Once a debt has been removed, the creditor is no longer permitted to pursue collection or confiscate property from the debtor.
However, individuals often reorganize their bankruptcy because they believe it will eliminate all of their debt. It’s best to consult Chapter 13 bankruptcy lawyers first before making any big decisions.
Can Chapter 13 discharge all of your debts? Read on to find out more.
Can Chapter 13 completely wipe your debts?
The answer is no. However, not all debts are dischargeable, and some are very difficult to discharge. Even while filing for bankruptcy under Chapter 7 or Chapter 13 is to free you from your obligations so that you may go on with your life, not all debts can be eliminated in this way. 19 liabilities cannot be discharged under either Chapter 7 or Chapter 13.
Alimony and child support are two common commitments that cannot be discharged via the Chapter 13 bankruptcy process. Other examples include debts for deliberate and malicious injury done to another person or property and certain unpaid taxes, such as tax liens.
What then is the purpose of Chapter 13?
If you file for Chapter 13, you will be able to restructure your financial commitments and makeup up past due payments, such as mortgage or vehicle loan installments. After completing the Chapter 13 repayment plan, you will be granted a discharge that cancels most of the debts you still owe. The following are some examples of major debts that Chapter 13 may discharge.
Nonpriority Unsecured Obligations
In contrast to priority claims, which are paid before other obligations, most unsecured nonpriority debts get no special treatment in bankruptcy. Most unsecured nonpriority debts are dischargeable in Chapter 13 bankruptcy unless the creditor can demonstrate that you obtained the debt via fraud or deception. This includes medical expenses, past income tax liabilities, and personal loans.
Secured Obligations That Are Compressed or Stripped
A bankruptcy discharge usually doesn’t remove liens. Mortgage or vehicle loan lenders have a security interest in your property. If you don’t make payments, the lender may take your property or car, notwithstanding your bankruptcy discharge.
However, Chapter 13 may help you preserve your home. You may be able to eliminate a wholly unsecured junior lien, such as a second mortgage, via lien stripping or lower the outstanding sum of other secured obligations, such as a vehicle loan, through Chapter 13 cramdown if you meet certain circumstances.
If you remove a junior lien against your home, it will be categorized as a nonpriority unsecured debt in your bankruptcy filing and discharged when you obtain your discharge. When a vehicle loan or other secured debt is consolidated, the loan is divided into secured and unsecured sections. The secured part must be repaid via your repayment plan. However, the unsecured portion is discharged upon completion of the plan and receipt of a discharge.
According to your Chapter 13 repayment plan, you must make monthly payments to a bankruptcy trustee for three to five years if you file for Chapter 13 bankruptcy. You are discharged after all mandatory plan payments have been made.