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.


It has just become a little easier to file Chapter 13 and you can keep just a little more in Chapter 7

On April 1 there were a few of small changes in bankruptcy law most of which do not affect that many people. On April first every three years certain amounts in the Bankruptcy Code automatically increase based on the Consumer Price Index.

One change that helps some consumers is the increase in the unsecured maximum debt limit in Chapter 13 from $360,475 to $383,175. Particularly some self-employed individuals may now be eligible to file Chapter 13 as the unsecured debt limited pushed upward.

Chapter 11 debtors should be aware of a bad change because the burdens of small business status now come for debtors who owe less than $2,490,925 rather than $2,343,300. Watch out because small business status used to be optional prior to 2005 but now it is more of a curse than a blessing and it is mandatory rather than optional.

The one change that is likely to affect the most debtors is the increase in the amounts under the federal bankruptcy code exemptions. The homestead exemption went up by $1,350, the automobile exemption went up by $275, total household good amounts by $725, jewelry by $100, tools of trade by $125, life insurance policies by $325, and personal injury claims by $1,350. Remember that married couples filing jointly can double the amounts and that very few people filing in Texas ever have to give up anything to the Chapter 7 trustee.

Also those who have owned their home less than about 4 years (as long as you lived in Texas two years before filing) now enjoy a $155,675 cap on their homestead exemption as opposed to the old $146,450. Most people who are our clients at Bailey & Galyen do not have that much home equity though, so this is seldom a problem.

Bankruptcy is a complex combination of law and numbers, so email or call us at 1-800-215-9098 to make an appointment with our attorneys about your situation so we can help you!

Vehicles in Bankruptcy

We all love our cars and, more importantly, we need our cars. A common question for those considering bankruptcy is can I keep my car, and if I have a payment, how do I pay for it?

The answer depends on several factors.

In a Chapter 7 liquidation case, cars used for personal and household purposes are exempt from the claims of creditors — you can keep them. This exemption is usually limited to one vehicle per driving-age member of the household. Keeping the vehicle is subject to any valid financing agreements, however — there are no free cars in bankruptcy! If you choose to keep the vehicle and have a car note, you can reaffirm (retain) the debt and it will survive the bankruptcy, and you will be bound to the original terms of the note.

In a Chapter 13 case, cars are also exempt as in Chapter 7. However, a Chapter 13 payment plan can be used to pay the car note under different terms than under the original contract. If you have owned a vehicle for 910 days (two and a half years), then you can pay the value of the vehicle through your bankruptcy rather than the amount of the debt. Due to the depreciation of cars, this can be a substantial savings. In most cases we can also alter the interest rate paid to the creditor, another source of savings. Lastly, the payment itself can be stretched over a 60-month term. You can see how in Chapter 13, we can essentially “refinance” the car note to reduce your payment — and at the end of the case, you get clear title to the vehicle!

It should be pointed out that, in either type of bankruptcy, if you would like to be free from your car note, you can surrender the vehicle to the creditor and discharge (eliminate) the debt.

Lastly, note that motorcycles “count” as vehicles in all respects. If you have two driving-age members in your household and own two cars and a motorcycle, the motorcycle would typically not be an exempt asset and the creditors would be entitled to the net value of the motorcycle.

As in all legal matters, it is important that you get legal advice specific to your situation. Give us a call at your convenience to set up a free appointment to discuss your legal situation.


Can bankruptcy save my home from foreclosure?

Can bankruptcy save my home from foreclosure?

Under current bankruptcy laws, an individual or family may be able to stop foreclosure of their family home. Many families who are facing foreclosure find that either their mortgage company will not work with them to stop a foreclosure, or want a very large cash payment in order to modify their mortgages.

Many individuals and families are able to save their homes from foreclosure by filing a Chapter 13 bankruptcy, which is a debt reorganization under bankruptcy law. In most cases, filing Chapter 13 stops the foreclosure process, preventing eviction and giving the homeowner time to file a plan to reorganize debts. Without the looming threat of foreclosure and eviction, homeowners can work with their attorney to create a plan that allows them to affordably reorganize their debts and save their home.

Chapter 13 allows the homeowner to create a plan to repay the house payments that were missed prior to bankruptcy over three to five years. If the homeowner has fallen behind on property taxes, the property taxes can be paid over time in the Chapter 13 plan as well. Normally the homeowner makes one payment to a court appointed trustee, who pays debts included in the plan from the payment. After filing Chapter 13, the homeowner then resumes making the regular monthly payment on the home, while the arrears are paid to the mortgage company by the trustee.

Chapter 13 can make it easier for the homeowner to resume making their house payments by restructuring their other debt as well. Credit cards, medical debt, personal loans, and other unsecured debts are paid through the plan, but may not have to be paid in full, depending on the homeowner’s income and family size. Many chapter 13 filers pay only a small percentage on these debts with the balances being “discharged” or forgiven by the court when the plan is successfully completed. Some car loans can be restructured to reduce the balance of the loan to the value of the vehicle, and to reduce the interest rate.

A homeowner who is facing foreclosure may be able to use the protections of bankruptcy to allow them to catch up missed payments over a reasonable period of time, and protect the equity they have in their home.

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Student Loans Are Burying Me. What Can I Do?

Many Americans have borrowed tens or even hundreds of thousands of dollars in student loans, only to find that the education they received has not helped them achieve an income level that allows them to pay their student loans. Many others pay their student loans but are unable to purchase homes, or new cars, or even dinners out, because their student loans are such a burden on their budget.

The numbers clearly show this burden is large and growing. In 2004, 66% of graduates of 4 year universities had student loan debts. The average debt was $19,200, which was a 108% increase from ten years earlier. For those with graduate degrees, the numbers are much higher, ranging from $32,858 for those receiving Master’s degrees, to over $125,000 for medical school graduates. For many people, student loans are a crippling financial burden.

Can bankruptcy help? The short answer is yes and no.

First the bad news, bankruptcy will almost certainly not discharge, or eliminate, student loans. In 1998, Congress changed the bankruptcy laws to make most student loans non-dischargeable, and in 2005 all other student loan were made non-dischargeable. There is an exception to the rule, but almost no one qualifies for the exception. In short, bankruptcy almost never wipes away student loans.

Where bankruptcy can help is to give an individual a break from student loan repayment and harassment from student loan collectors. If a borrower is in default on student loans, and receiving phone calls, threatening letters, being sued, or having their wages garnished for student loans, the automatic stay in a Chapter 13 bankruptcy can stop all of these collection tactics for the duration of the case. This allows the borrower time to “catch their breath” and reorganize their debts, without the burden of student loan collection efforts or wage garnishment.

While not eliminating student loans, a bankruptcy discharge may allow an individual to eliminate other debts, such as credit cards, medical bills, foreclosure or repossession deficiencies or personal loans, so that the individual can dedicate the money from these payments to pay their student loans.

There may be non-bankruptcy alternatives to eliminating student loans as well. Many Federal student loans can be cancelled by the U.S. Department of Education if the borrower dies or becomes totally and permanently disabled. In addition, under some circumstances a student loan may be cancelled if the school the borrower attended closed while the borrower was enrolled or soon thereafter, or if the school improperly certified the student’s ability to benefit from the training provided by the school.

Finally, state and Federal governments have several programs to forgive student loans of individuals in certain fields and professions, such as teaching, social work, medicine, and military service.