Is a Chapter 13 Discharge of Debts Better Than a Chapter 7 One?

Chapter 13 bankruptcy can discharge more debts than a “straight” Chapter 7 bankruptcy case. But not much more.

When the Bankruptcy Code first became law in the late 1970s, Congress wanted to give debtors some extra incentive to file Chapter 13 payment plans instead of straight Chapter 7s. So the Code at that time allowed the discharge (legal write-off) of many categories of debts under Chapter 13 that could not be discharged under Chapter 7. The broader discharge of debts under Chapter 13 informally came to be called a “super-discharge.” But in the decades since then Congress has amended the law many times, steadily reducing the categories of debts discharged only under Chapter 13. Now only two are left.

1. Nonsupport Obligations

A divorce usually results in two kinds of obligations: support and nonsupport. Under neither Chapter 7 nor Chapter 13 can you discharge support obligations like child and spousal support debts. You can’t discharge nonsupport obligations either in a Chapter 7 case. But you can discharge nonsupport obligations in a Chapter 13 case.

What are nonsupport obligations? They include all the financial obligations arising out of a divorce (or legal separation) that are not support obligations. You may hear them referred to as “property settlement” obligations. They tend to be obligations ordered by the court in the divorce decree stating that one ex-spouse pay a certain amount of money to the other ex-spouse in compensation for having received more than his or her share of the marital property. Sometimes it is instead formulated as an obligation to pay a joint debt or one of the ex-spouse’s debts, again intended to even out the split of property.

These property settlement obligations are the nonsupport ones that can be discharged in the Chapter 13 super-discharge.

2. “Willful and Malicious Injury” Obligations

If someone has a debt for “willful and malicious” injury, that means the debtor is alleged to have hurt someone or someone’s property, and done so either intentionally or at least with a reckless disregard for the safety of that person or property. Sometimes the allegations have been resolved in a trial and resulted in a judgment for damages for the injury before the “judgment debtor” files for bankruptcy. Other times the bankruptcy is instead filed before a judgment has been entered.

A debt for “willful and malicious injury” cannot be discharged under Chapter 7 if the injured party objects to its discharge. Section 523(a)(6) makes clear that a Chapter 7 discharge “does not discharge an individual debtor from any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity.”

However, part of such a debt can be discharged under Chapter 13. Section 1328(a)(2) lists the categories of debts that are not discharged in a Chapter 13 case, and that list excludes from discharge “willful and malicious injury” “that caused personal injury to an individual or the death of an individual.” Notice it does not mention injury to a person’s property. So a debt arising from “willful and malicious injury” to another’s property can be discharged under Chapter 13 (but not under Chapter 7).

What ARE “Nonsupport” and “Willful and Malicious Injury” Debts?

These two categories of debt included in the Chapter 13 super-discharge are not always straightforward in what they cover. “Support” obligations CAN include those that the divorce decree does not call by that name, but that the bankruptcy court determines are “in the nature of support.” As a result, a debt that may appear to be a nonsupport obligation might actually not be. And the line between damage to property that arose out of “willful and malicious” behavior and damage that did not is certainly not always clear.

So the decision to use Chapter 13 bankruptcy to take advantage of the super-discharge involves delicate legal, human and tactical considerations. You need to weigh these considerations carefully with an experienced bankruptcy attorney. So if you live in the Dallas-Fort Worth metroplex, the attorneys at Bailey & Galyen can help you with these decisions. Please call us for a free, no-obligation, confidential consultation at 800-215-9089. Or you can reach us here.