Debts Covered in a Chapter 13 Bankruptcy but Not a Chapter 7 Bankruptcy

Debts Covered in a Chapte…

When you are considering bankruptcy, you probably have a few different priorities: to get out from under your debt and keep as much of your property as you can. But not all debts are created equal, and some are treated differently depending on the type of bankruptcy you file. Find out about debts covered in a Chapter 13 bankruptcy but not a Chapter 7 bankruptcy, and how which type you file can affect your life after discharge.

In this blog post I will discuss debts covered in a Chapter 13 bankruptcy but not a Chapter 7 bankruptcy. I will explain how non-dischargeable debts can affect your decision about whether to file for bankruptcy and how to choose between the two types of bankruptcy based on your financial situation.

What is a Dischargeable Debt?

The main purpose of a Chapter 7 Bankruptcy is to allow a debtor to discharge unsecured debts they cannot pay. The bankruptcy trustee liquidates (sells off) any non-exempt assets the debtor has, and then divides the proceeds among the debtor’s creditors. In most cases, that means creditors have to settle for less than their full balance. The rest of the debt is discharged, and the debtor no longer has to pay.

Dischargeable debts under Chapter 7 include:

  • Credit cards
  • Medical bills
  • Past-due utility bills
  • Judgments from civil lawsuits (except for drunk or drugged driving)
  • Leases or service contracts
  • Personal loans from friends and family
  • Promissory notes
  • Business debts
  • Old unpaid taxes and penalties
  • Attorney fees
  • Social security or veterans assistance overpayments

What Debts Survive a Chapter 7 Bankruptcy?

However, Chapter 7 doesn’t apply to any secured debts. These are debts where the debtor puts up some property (most often their home or car) as collateral. If the person fails to pay the debt, the creditor is allowed to take the property. The most common types of secured debts are:

  • Mortgages
  • Home equity loans
  • Car loans

These debts will continue on, even after the Chapter 7 Bankruptcy is over. However, the bankruptcy trustee may use some of the debtor’s assets to pay past-due balances on these accounts.

There are also several kinds of debts that are “non-dischargeable” in a Chapter 7 Bankruptcy, including:

  • Child support and alimony (spousal support)
  • Criminal fines, penalties, and restitution
  • Newer tax debts
  • Debts related to drunk or drugged driving injuries
  • Student loans

Sometimes, a debtor can petition the court to discharge student loans or regular income tax debt. But to do that, the debtor and his or her bankruptcy attorney will have to convince the court that you have suffered an “undue hardship” and cannot afford to pay the debt despite making a good faith effort.

Debts Covered in a Chapter 13 Bankruptcy but Not a Chapter 7 Bankruptcy

A Chapter 13 bankruptcy works differently than a Chapter 7 bankruptcy. Debts under a Chapter 7 bankruptcy are discharged using a lump sum from the debtor’s collected assets. In a Chapter 13 bankruptcy, the debtor and his or her attorney set out a payment plan to repay as much of the money owed as his or her income allows. Because of this, and differences in the laws related to the two procedures, there are some debts covered in a Chapter 13 bankruptcy that will not be discharged in a Chapter 7 bankruptcy:

  • Marital debt from a Judgment of Divorce or Separation Agreement (other than child support or alimony)
  • Balances taken out to pay off non-dischargeable tax debt
  • Court fees
  • Homeowners’ Association or Condo Association fees
  • Loans taken against retirement plans
  • Holdover debts from a previous bankruptcy

If you qualify for a Chapter 13 bankruptcy, and are able to successfully complete the payment plan, it can free you from more debt than filing a Chapter 7 bankruptcy. It can also do so without causing you to lose your home or other important assets.

Choosing the right type of bankruptcy requires a thoughtful look at your financial situation and your needs and priorities. There isn’t one strategy that is right for every family. At John A. Steinberger & Associates, P.C., we are a full-service bankruptcy law firm in Southeast MI. We serve debtors and families in Southfield, throughout Metro Detroit, and in the surrounding communities. We will help you review your options and choose the bankruptcy strategy that is right for you. Call us toll-free at (866) 690-2140 or contact us online to schedule a free initial consultation.