Many debtors file for Chapter 13 bankruptcy to reorganize their debts and catch up on their missed mortgage or car loan payments through an affordable repayment plan. If you successfully complete your repayment plan, you will receive a bankruptcy discharge that wipes out your personal liability for most of your debts. Read on to learn more about the types of debts you can eliminate in Chapter 13 bankruptcy.
For more information on how the Chapter 13 bankruptcy discharge works, see our topic area on The Bankruptcy Discharge.
Nonpriority General Unsecured Debts
For many bankruptcy debtors, most of their obligations fall into the nonpriority unsecured debt category. In general, nonpriority unsecured debts are the easiest obligations to eliminate in bankruptcy because they receive no special treatment under the law. If a nonpriority unsecured creditor wants to challenge your discharge, it must typically prove that you committed fraud when you obtained the debt.
The following are some of the most common nonpriority general unsecured debts you can wipe out in Chapter 13 bankruptcy:
- credit card obligations
- medical debt
- personal loans
- older income taxes that qualify as nonpriority debts
- most types of lawsuit judgments (be aware that a Chapter 13 discharge will not eliminate any debts arising out of willfully and maliciously injuring another person), and
- outstanding utility bills.
Liens You Cram Down or Strip in Chapter 13 Bankruptcy
In bankruptcy, certain obligations are referred to as secured debts because the creditor has a lien on a piece of property you pledged as collateral. Simply receiving a bankruptcy discharge doesn’t automatically eliminate a creditor’s lien from your property. Even if you receive a discharge, secured creditors retain their right to foreclose on or repossess your property if you default on the obligation.
But if you can satisfy the necessary requirements, Chapter 13 bankruptcy may allow you to modify or remove certain liens from your property through:
- a cramdown, or
- lien stripping.
Chapter 13 Bankruptcy Cramdown
A Chapter 13 bankruptcy cramdown allows you to reduce the principal balance (or interest rate) you owe on a secured loan. But you must satisfy certain requirements before you can cram down a secured debt.
If you qualify, the loan will be divided into secured and unsecured portions. You will pay the secured portion in full through your Chapter 13 plan. The unsecured portion will be treated as a nonpriority unsecured debt and any unpaid amount will be discharged at the end of your bankruptcy.
To learn more about whether you qualify to cram down a lien in bankruptcy, see How a Cramdown Works in a Chapter 13 Bankruptcy Case.
If your first mortgage (or other senior lien) balance exceeds the value of your home, you may be able to remove a junior lien (such as a second mortgage) from your home through a process called lien stripping. When you strip a junior lien, it’s treated as a nonpriority unsecured debt in Chapter 13 bankruptcy and wiped out when you receive your discharge.
For more information on lien stripping, see How to Strip a Second Mortgage or HELOC in Chapter 13.
Debts You Can Eliminate in Chapter 13 Bankruptcy But Not in Chapter 7
In general, you can wipe out more types of debt in Chapter 13 bankruptcy than in a Chapter 7. Some of the most common debts you can discharge in Chapter 13 bankruptcy but not in Chapter 7 include:
- debts for willfully and maliciously damaging someone’s property
- debts you incurred to pay nondischargeable tax obligations
- debts incurred as a result of a divorce decree, separation or property settlement agreement, or a similar proceeding that are not characterized as support payments (support obligations such as alimony or child support are not dischargeable in Chapter 7 or Chapter 13 bankruptcy)
- debts included in a prior bankruptcy in which the court denied your discharge
- 401(k) or other retirement account loans
- HOA fees incurred after filing for bankruptcy, and
- certain government fines and penalties (not including criminal fines).
To learn more, see Debts Discharged in Chapter 13 Bankruptcy But Not in Chapter 7.
How Do You Receive a Chapter 13 Bankruptcy Discharge?
Most Chapter 13 repayment plans last three to five years. If you want to receive a Chapter 13 bankruptcy discharge, you must complete all of your required plan payments. If you stop making your payments prior to completing your bankruptcy, the court will typically dismiss your case without a discharge of your debts.