Debts that Remain After a Chapter 13 Discharge
Obtaining a discharge in a Chapter 13 bankruptcy will not eliminate all debts. Some of the debts will remain after bankruptcy. Exceptions to a Chapter 13 discharge include, generally:
- Claims for child support and spousal support (alimony)
- Educational loans
- Drunk driving liabilities
- Criminal fines and restitution obligations
- Certain long-term obligations, such as home mortgages, that extend beyond the term of the plan
- Any debts not provided for in a wage-earner plan
More on these exceptions to the Chapter 13 discharge follows below. For additional information, see Exempt Property in a Chapter 13 Bankruptcy; The Chapter 13 Debt Discharge; and What are a Debtor's Obligations Under Chapter 13?
What Are Domestic Support Obligations in Chapter 13?
Domestic support obligations are simply debts incurred before or after bankruptcy that fulfill the following requirements:
- They are owed to your current or former spouse, child, or a government entity
- They are by their nature alimony, support, or maintenance
- The obligation should be established as part of a "divorce decree, separation agreement, property settlement agreement, court order, or administrative determination." See Section 101(14A) of the Bankruptcy Code.
Spousal and Child Support
The effect of a discharge on child and spousal support obligations varies somewhat depending on whether you filed a Chapter 7 or a Chapter 13 bankruptcy.
Whereas a Chapter 7 filing will have little effect on such obligations, a Chapter 13 proceeding may stop collection activities for these debts, 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." The different chapters of the Bankruptcy Code define "property of the estate" differently.
Under Chapter 13, the Bankruptcy Code considers the debtor's earnings as property of the estate, since the repayment 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 in Chapter 13. 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 believes the plan does not include adequate provisions, it may decide to lift the stay.
Domestic Support Options Are High Priority Debts
The 2005 revision to the Bankruptcy Code made the collection of domestic support obligations a much higher priority. Domestic support obligations are now specifically excepted from discharge.
A Chapter 13 case may be dismissed if the debtor fails to pay any domestic support obligation that becomes payable after the filing of the petition. Domestic support obligations that are assigned to a governmental unit may be paid less than 100% but only if disposable income is dedicated to the plan for a full five years.
The gist of the change is that a Chapter 13 debtor must certify the payment in full of domestic support obligations or that the confirmed plan provides for payment of pre-bankruptcy domestic support obligations. Also, the priority of domestic support obligations was moved to the top of the list of priorities, and the preference provisions were amended to protect domestic support transfers from avoidance.
Can Alimony Be Discharged in Bankruptcy?
No. A debtor must continue to pay alimony even after Chapter 13 discharge. The same holds true for child support obligations. In other words, even at the conclusion of the bankruptcy proceeding, these ongoing obligations remain.
As noted above, educational loans guaranteed by the United States government are also generally not discharged by a 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 their dependents. In order to qualify for a hardship discharge, the debtor must demonstrate that:
- They cannot make payments at the time the bankruptcy is filed, and
- They will not be able to make payments in the future.
The debtor must apply for the hardship discharge 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 use 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 themself and their dependents;
- Duration: The financial circumstances that satisfy the income test in (1) will continue for a significant portion of the repayment period; and
- Good Faith: The debtor must have made a good-faith effort to repay the loan prior to the bankruptcy.
Get Solutions to Your Chapter 13 Issues: Contact an Attorney
Handling debt involves many important and delicate decisions. If you understand your rights, you can get out from under your debt burden while still preserving some important assets. Contact a local bankruptcy attorney, who can best help plan your return to solvency.
Contact a qualified bankruptcy attorney to find out your options for navigating the best path forward.