I’ve written in earlier blogs about the decision-making involved in deciding whether filing a chapter 7 bankruptcy case or a chapter 13 bankruptcy case is the best choice for a particular client.
There are many factors that go into this decision-making. Among the factors is one that I want to look at closely in this blog: debts that may not be discharged in a chapter 7 case can be discharged in a chapter 13 case. The bankruptcy code governs the differences between Chapter 7 and Chapter 13, including how debts are adjusted and discharged.
The operation of the discharge in chapter 13 of debts not discharged in chapter 7 is called the chapter 13 “super” discharge. The ability of chapter 13 to discharge debts that cannot be discharged in a chapter 7 case is something that clients should consider as they decide whether to file a chapter 7, or a chapter 13 bankruptcy case.
Why Does the “Super” Discharge Exist?
Why are there some debts that can be discharged in a chapter 13 that are not subject to discharge in a chapter 7 case? The answer is that, at one time, Congress wanted to encourage an increase in chapter 13 cases. Congress found that most people sought the benefits of the liquidation theory of chapter 7 bankruptcy - the chapter 7 discharge comes within months of filing; the chapter 13 discharge, years.
Chapter 7 has typically been the bankruptcy chapter that is less expensive in terms of attorney fees. And chapter 7 carries with it a “no strings attached” scenario - the chapter 7 debtor doesn’t have to make payments on discharged debt after the chapter 7 case is filed.
Chapter 13 is slower, more expensive and the chapter 13 debtor has to commit to make monthly payments to pay at least a portion of the debt owed. Since chapter 13 wasn’t as popular as chapter 7, in 1978 Congress created the super discharge - it was a “carrot,” so to speak, to encourage people to file a chapter 13 bankruptcy.
Chapter 13 provisions also protect co-debtors from collection actions for consumer debts, which typically include personal, family, or household obligations, thereby offering debtors significant financial relief and security against creditors during the repayment plan.
What Unsecured Debts are subject to the Super Discharge?
When Congress created the super discharge in 1978, the chapter 13 discharge was very broad, and it included several types of debts that chapter 7 did not discharge. However, under pressure from creditors’ groups, Congress has amended the super discharge provisions to reduce the type of debts that can be discharged in a chapter 13 case, while not discharged in a chapter 7.
Here are the main types of debts that are subject to the chapter 13 super discharge:
“Stale” Income Taxes. A chapter 13 debtor’s income tax liability can be discharged in a chapter 13 case, provided the debtor’s liability meets certain criteria.
Debts caused by willful and malicious injury to people or property. It may seem unusual to allow debts arising from an individual’s deliberate actions to be discharged in a chapter 13, but this provision makes sense if we remember that insurance will cover many (although certainly not all) damages caused by someone’s intentional acts.
This provision allows someone who has deliberately injured another person, or who has caused damage to another person’s property to make monthly payments for three to five years to pay at least a part of the damages back to the property owner, and then, after the time period for the chapter 13 has passed, to move on from that financial obligation.
An exception to the discharge of liability for willful and malicious injury in chapter 13 is for a situation in which there is an award of damages existing for injury to another person at the time the chapter 13 case is filed - in that circumstance, discharge of that debt is not available.
Government Fines, Penalties and Forfeitures. Most obligations owed to the government cannot be discharged in a chapter 7 case, but court fines and penalties can be discharged in a chapter 13.
Debts that were denied discharge in a previous case. If a debt in a previous chapter 7 or chapter 13 case was determined to not be discharged in that bankruptcy by the bankruptcy court, that debt can be discharged if the debtor files a “new” chapter 13 case.
People in this situation should be mindful of the fact that a chapter 13 debtor must wait four years from the date a previous chapter 7 case was filed to receive a discharge in the new chapter 13 case. Additionally, the repayment hierarchy among different types of creditors, including unsecured creditors, must be considered.
Debts resulting from fraudulent bank activity. Since only people can file a chapter 13 case, this super discharge is not available to banks themselves; but any individual required to pay for fraudulent bank activity can receive a chapter 13 discharge. Be careful about this, though, court-ordered restitution payments are not subject to the chapter 13 discharge. Unsecured debt resulting from fraudulent bank activity is treated differently in Chapter 13.
Debts incurred to pay taxes. If a debtor borrows money, or uses a line of credit or a credit card to pay tax liability that cannot be discharged in a chapter 7 bankruptcy case, that tax-related debt cannot be discharged in a chapter 7 case, but it can be with chapter 13. Debts incurred to pay nondischargeable tax obligations can be discharged in Chapter 13, illustrating the complexities of bankruptcy laws and the importance of legal counsel.
Property settlements in divorce cases. The debtor who owes another person money for child support or spousal maintenance payments cannot receive a discharge in either chapter 7 or chapter 13. Property settlements, though, are a different story. A debtor’s obligation to pay an ex-spouse a property settlement can be discharged in a chapter 13. A divorce decree can influence the discharge of property settlement debts. However, domestic support obligations like alimony and child support are nondischargeable.
Home owners’ association fees. Homeowners’ fees that were due and owing at the time a bankruptcy case was filed are subject to discharge in either chapter. But fees and dues that come due after the filing of the bankruptcy case can be discharged in a chapter 13 - although not in a chapter 7.
Chapter 13 also allows individuals to reschedule secured debts, such as car loans, over the lifespan of the repayment plan, making it easier to manage monthly payments while protecting significant assets like homes from foreclosure.
For some violations of Securities Laws. Anyone who has acted illegally with respect to Securities Laws cannot receive a chapter 7 discharge for any fine, penalty or restitution as a result of a court or arbitration decision. Chapter 13 debtor, on the other hand, can get these obligations discharged. Various types of nonpriority unsecured debts can be discharged at the end of a repayment plan.
As noted earlier, the list of debts subject to a super discharge in chapter 13 used to be greater. This shift in dischargeability represents the government’s decision to use a “stick” rather than a carrot to attract chapter 13 cases. Rather than using the super discharge in chapter 13 as an inducement to file, the provisions of the chapter 13 discharge, by and large, are constructed now to force chapter 7 debtors who look to have difficulties in filing chapter 7’s into a chapter 13 payment plan.
Chapter 13 Bankruptcy in Minnesota: Unlocking the Power of the "Super Discharge"
While Chapter 7 bankruptcy offers a swift resolution for many debt problems, it’s not always the most suitable option for everyone. Chapter 13 bankruptcy in Minnesota presents a unique alternative, especially with its potent tool known as the “super discharge.”
Chapter 13 also allows individuals to reschedule secured debts, such as car loans, over the lifespan of the repayment plan, making it easier to manage monthly payments. Let’s delve into the intricacies of this powerful discharge and explore how it can benefit Minnesotans facing financial hardships.
Understanding the Chapter 13 Super Discharge under the Bankruptcy Code
Unlike the more immediate debt relief of Chapter 7, Chapter 13 involves a structured repayment plan typically spanning three to five years. A debtor's repayment plan must address unsecured claims, ensuring that unsecured creditors, who do not have rights to specific property to secure their debts, are included in the distribution of repayment funds.
In exchange for committing to this plan, you gain access to the super discharge, which has the potential to eliminate debts that are otherwise non-dischargeable under Chapter 7.
A Broader Scope of Debt Relief in Minnesota
The super discharge in Chapter 13 bankruptcy in Minnesota covers a wider range of debts compared to Chapter 7. While the specifics can vary based on your individual circumstances and the latest legal developments, several key categories often qualify. Repayment plans address unsecured debts differently from priority or secured debts, noting that most unsecured debts can be discharged after fulfilling plan requirements:
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Older Income Taxes: “Stale” income tax debts that meet specific criteria can be discharged, offering significant relief to those burdened by back taxes.
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Debts from Willful and Malicious Injury: Debts stemming from intentional acts of harm to others or their property may be discharged. However, court-ordered restitution or debts for personal injury remain non-dischargeable.
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Government Fines and Penalties: Court fines, penalties, and certain government-imposed debts that are typically non-dischargeable under Chapter 7 can be eliminated under Chapter 13.
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Debts Denied Discharge in Prior Cases: If you previously filed for bankruptcy and certain debts were deemed non-dischargeable, you might have a second chance to eliminate them in a subsequent Chapter 13 case.
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Homeowners’ Association (HOA) Fees: HOA fees that accrue after filing for bankruptcy can be discharged under Chapter 13, easing the financial burden for homeowners struggling with these obligations.
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Certain Securities Law Violations: Fines, penalties, or restitution resulting from certain securities law violations can be discharged, providing a potential path to financial recovery.
Weighing the Pros and Cons of Chapter 13 Bankruptcy in Minnesota: Addressing Nondischargeable Tax Obligations
Deciding whether to pursue Chapter 13 bankruptcy in Minnesota requires careful consideration of its advantages and disadvantages:
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Pros:
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Broader debt relief: The super discharge can eliminate debts not covered by Chapter 7.
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Asset protection: You can often keep your assets, such as your home or car, while repaying debts over time.
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Mortgage arrears catch-up: Chapter 13 allows you to catch up on missed mortgage payments and potentially avoid foreclosure.
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Discharge of unsecured debts: Discharging unsecured debts can offer debtors potential relief and better management of their finances.
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Cons:
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Longer repayment period: You’ll be committed to a three-to-five-year repayment plan.
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Stricter eligibility requirements: Chapter 13 has income and debt limits.
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Court-approved budget: You’ll need to adhere to a court-approved budget throughout the repayment plan.
Is Chapter 13 Bankruptcy Right for You in Minnesota?
The decision to file for Chapter 13 bankruptcy should be made after careful consideration of your individual circumstances, financial goals, and the nature of your debts. An experienced Minnesota bankruptcy attorney can provide invaluable guidance, helping you navigate the complexities of the process and ensuring you make informed decisions that align with your best interests.
Seek Professional Guidance
If you're struggling with debt in Minnesota and considering bankruptcy, consulting with a qualified bankruptcy attorney is crucial. They can assess your eligibility for Chapter 13, evaluate the potential benefits of the super discharge, and guide you through the entire process to achieve the best possible outcome. Remember, bankruptcy is a legal tool designed to help you regain financial stability, and with the right approach, you can emerge from it with a fresh start and a brighter future.
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