Are you overwhelmed by your debt and looking for a way out? Bankruptcy might be the right choice. But before filing, you should understand your options and whether they’ll lead to a discharge. When a court discharges a debt, you’re no longer obligated to pay it.
Whether or not the court discharges your debt depends on the situation. First and foremost, Chapter 13 is a repayment plan. You can expect to pay down your debts for several years. Only then may a court eliminate some of your remaining debt if you meet specific requirements.
What Is Chapter 13 Bankruptcy?
The average person goes through one of two types of bankruptcy: Chapter 7 or Chapter 13. While Chapter 7 eliminates all your debt, Chapter 13 is a repayment plan. Once you file, you’ll work with a trustee to come up with a court-approved payment plan. You pay the trustee, who then pays your creditors. No more creditors calling or sending intimidating letters.
Over three to five years, you pay down your debts. If your current income is more than your state’s median income, you’ll have a five-year plan. If your income is less than the median, you’ll have a three-year plan.
The Benefit of Chapter 13
The benefit of Chapter 13 is that you stop accruing debt, and you often get to pay pennies on the dollar. For instance, if you owe $15,000 in medical debt, you may only pay a fraction of that. The court may discharge the remaining amount you aren’t able to pay over the years.
Another benefit of Chapter 13 is that you may keep your important assets, like your home or car. You don’t have to give up everything to pay your debts and move forward in a better financial position.
What Gets Paid First Under Chapter 13
The three types of creditors’ claims in Chapter 13 are:
These will matter during your repayment plan because some creditors are entitled to more compensation than others.
When deciding whether to file for bankruptcy and under which chapter, it’s helpful to talk with an experienced bankruptcy lawyer. Adrienne Hines can explain how the court prioritizes different creditors and what that means for your day-to-day life.
These receive a special status by the court. Your plan must pay off priority claims completely – with some exceptions.
Common priority claims are:
- Bankruptcy filing fees
- Child support
These claims are from creditors who have a right to take control over collateral if you don’t pay. Examples of these are homes and auto loans. If you want to keep whatever collateral secures the debt, you must pay that creditor at least the value of the collateral property.
You can continue to pay based on the original payment terms if you make up for the past due amount during your repayment plan.
For example, if you’re behind on your mortgage payments, Chapter 13 stops foreclosure proceedings and lets you catch up. Over a reasonable time, you can make up for the late payments. This is often a top priority for people.
If you can’t make up the late payments and pay the regular mortgage payments, you could still lose your home. You can talk with your lawyer about whether it’s in your best interests to try to keep your home or sell.
These claims aren’t backed by collateral, and the creditor can’t take anything from you if you don’t pay.
Examples of these include:
- Credit card debt
- Medical debt
- Payday loans
You don’t have to pay unsecured debts in full. Instead, you pay all your disposable income toward the debt during your three-year or five-year repayment plan. The unsecured creditors must receive as much as they would have if you’d filed Chapter 7.
Whether the court will discharge any of your debts after you complete your repayment plan depends on the circumstances. Chapter 13 law is complicated, and each person’s situation is unique. You’ll want to talk with a bankruptcy lawyer about the likelihood of discharge under Chapter 13.
Circumstances for Debt Discharge
Your remaining debts may be discharged if you have:
- Paid all your domestic support obligations
- Not received a discharge in a previous case filed two years for a Chapter 13 bankruptcy or four years for a Chapter 7, 11, and 12 bankruptcy
- Completed an approved financial management course
Debts That Can’t Be Discharged
The court can’t discharge some types of debts, including but not limited to:
- Child support
- Federal loans
- Court-ordered restitution based on a crime
Another situation in which you may not pay all your debts is if something prevents you from completing your repayment plan. For example, you may have suffered a catastrophic injury through no fault of your own that prevents you from working.
With the help of a lawyer, you may ask for a hardship discharge, which would eliminate your non-priority unsecured debts.
Call Today if You Are Filing for Chapter 13 Bankruptcy
If you’re working and trying to pay your debts, but they’ve become too much, contact Kademenos, Wisehart, Hines, Dolyk & Wright Co. LPA to talk with Adrienne Hines.
She’ll talk with you about your situation, the debts you’d pay off during Chapter 13, and whether a court may discharge any of your debts.