What Debts does Chapter 13 Cancel?
The basic difference between discharge of debt in chapter 7 and chapter 13 bankruptcy is this: in chapter 7 bankruptcy, the debt is discharged without your having made payments on it. In chapter 13 bankruptcy, you pay something on the debt (often very, very little), but once you’re done with modest chapter 13 bankruptcy payments, the unpaid balance on the debt is discharged. In chapter 13 bankruptcy, you may pay one penny on one dollar of debt and the rest of the debt (that penny’s ninety-nine little once-copper-but-now-zinc-friends) is forgiven forever.
These debts get discharged in chapter 13 bankruptcy:
- Credit Cards
- Medical bills
- Personal loans
- Civil judgments
- Vehicle loan deficiencies (such as after repossession)
- Mortgage liability after foreclosure
- And more
How do secured debts get treated in chapter 13 bankruptcy?
- In chapter 7 bankruptcy, you discharge secured debts (like mortgages and car loans), but security interests (liens) survive the bankruptcy: you have to pay off the loan if you want to keep the collateral. In chapter 13 bankruptcy, there’s more to it. Read on:
- Vehicle loans (taken 910 days or more ago) can be crammed down, meaning the loan’s principal is reduced to the car’s current value. The leftover loan balance (the “negative equity”) gets discharged after completion of the chapter 13 bankruptcy, so you win your pink slip for less..
- If you owe more on your first mortgage than your home’s worth, then your second mortgage (or equity line)–which started life as a secured debt–“becomes” an unsecured debt that gets fully discharged in chapter 13 bankruptcy. Meaning, upon completion of the chapter 13 bankruptcy, the second mortgage is stripped. The bank’s security interest is gone. Poof! You’ll have to pay off your first mortgage (natch), but you won’t need to pay off the second mortgage to win title to your castle. Cool, huh?
Do exceptions apply?
- There are exceptions to discharge. Bankruptcy relief is a privilege and not an entitlement. Fraud or the presumption of fraud can be the basis for denial of bankruptcy discharge. But with your San Diego Bankruptcy Attorney’s knowledge and confidence, you can achieve powerful results.
Debts that are NOT dischargeable in Chapter 13 Bankruptcy (meaning they have to be paid in full during the chapter 13) include:
- Domestic support
- Debts to society for certain fines and criminal acts (such as DUI)
- Taxes (except for income taxes that last became due 3+ years ago IF the tax-account record satisfies other criteria)
Student loan debt is not subject to discharge in bankruptcy. It doesn’t have to be paid in full in a chapter 13 bankruptcy, but you only get credit for dollar-for-dollar payments. Any unpaid student-loan balance will survive the chapter 13 bankruptcy.