A Chapter 13 discharge affects only those debts provided for by the plan. Any debts not provided for in the plan will remain, and the debtor will have to pay them in full, even after discharge. Additional exceptions to a Chapter 13 discharge include, generally, claims for spousal and child support; educational loans; drunk driving liabilities; criminal fines and restitution obligations; and certain long-term obligations, such as home mortgages, that extend beyond the term of the plan. A lawyer at in can explain which debts are “erased” as a result of a Chapter 13 discharge and which will remain the obligation of the debtor.
Spousal and Child Support
The effect of a discharge on child and spousal support obligations depends upon whether the debtor filed under Chapter 7 or Chapter 13 of the Bankruptcy Code. Whereas a Chapter 7 filing will have little effect on such obligations, a Chapter 13 proceeding may stop the collection activities, at least temporarily. The difference between chapters arises because, although all bankruptcies stop or “stay” creditors’ efforts to collect debts, the Bankruptcy Code excludes actions to collect child support or spousal maintenance from the stay unless the creditor attempts to collect from the “property of the estate,” and the different chapters of the Code define this term differently.
In a Chapter 7 proceeding, “property of the estate” includes all possessions, money and interests the debtor owns at the time a person files. Money earned after the bankruptcy is filed, however, is not property of the estate. Since most child and spousal support is paid out of the debtor’s current income, the bankruptcy should have little effect.
Under Chapter 13, however, the Code considers the debtor’s earnings as property of the estate, since the wage-earner plan is based on making payments from the debtor’s current income rather than from liquidated assets. As a result, support collections may be stayed. The court can decide to remove the stay to allow for withholding alimony and child support from the debtor’s income. Whether it does so may depend on how well the wage-earner plan provides for child and spousal support. If the court does not believe that the plan includes adequate provisions, it may decide to lift the stay.
Neither a Chapter 7 nor a Chapter 13 discharge affects post-discharge child or spousal support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these on-going obligations remain.
Educational loans guaranteed by the United States government are generally not discharged by a Chapter 7 or Chapter 13 bankruptcy. They may be dischargeable; however, if the court finds that paying off the loan will impose an undue hardship on the debtor and his or her dependents. In order to qualify for a hardship discharge, the debtor must demonstrate that he or she cannot make payments at the time the bankruptcy is filed and will not be able to make payments in the future. The debtor must apply before the discharge of the debtor’s other debts is granted. Application for a hardship discharge is not included in the standard bankruptcy fees, and must be paid for after the case is filed.
The Bankruptcy Code does not specifically define the requirements for granting a hardship discharge of a student loan. Courts have applied different standards, but they often apply a three-part test to determine eligibility:
- Income — if the debtor is forced to pay off the student loan, the debtor will not be able to maintain a minimum standard of living for himself or herself and his or her dependents
- Duration — the financial circumstances that satisfy the income test will continue for a significant portion of the repayment period
- Good Faith — the debtor must have made a good-faith effort to repay the loan prior to the bankruptcy
It is tempting to believe that a Chapter 13 discharge will leave the debtor completely debt free, but that is not the case. Certain debts remain even after bankruptcy. An experienced bankruptcy attorney at in can explain the differences between dischargeable and non-dischargeable debts and paint a realistic picture of your post-bankruptcy financial situation.