Some types of debts that are not dischargeable in Chapter 7 case may be dischargeable in a Chapter 13 bankruptcy filing. In addition, a Chapter 13 provides you with more options to deal with debts that are not dischargeable including paying them off during the course of your 3 to 5 year plan. This means that even if you qualify for a Chapter 7 under the means test, you might consider a Chapter 13 filing if you have debt that can only be discharged or handled in a Chapter 13 case.
Cram Down or Strip Liens
In a Chapter 7 bankruptcy you are generally not able to strip or cram down secured debts. This might be possible in a Chapter 13 case. In a case where you have more than one lien on a secured piece of property and one or more of the liens would not get any money because the fair market value of the property would only cover liens with more priority you may be able to strip those liens. As an example, if you own a home with a value of $100,000 and you have a mortgage of $120,000 and a second mortgage of 50,000, the second mortgage would not receive any value in a foreclosure and would basically not be secured and you may be able to strip it, treat it as unsecured debt, and discharge it in a Chapter 13 filing.
Cramming down a secured debt means reducing a secured debt that exceeds the fair market value of the secured property to the value of the secured property. In a Chapter 13 you may cram down secured debts except you are not allowed to cram down the mortgage on your principal residence.
As an example, if you have a car worth $10,00 with an outstanding loan balance of $12,000 you can cram down the secured portion of the loan to $10,000 and treat the remaining $2,000 as an unsecured debt. The unsecured debt would be treated like all your other unsecured debt under the Chapter 13 plan and any portion not repaid under the plan would be discharged.
When you cram down a loan the secured part of the loan is paid through your plan and the interest rate and term is determined by the bankruptcy court. This means that you will generally pay a lower interest rate and that you can extend the term of the loan to the term of your bankruptcy plan. This also means that any debt you cram down has to be paid during the bankruptcy plan which can create a problem if the original term of the loan is such that reducing it to the term of the bankruptcy creates a payment that exceeds your ability to pay. An example of this would be an investment property where you cannot pay at the entire crammed down amount of the loan in the 3 to 5 years of the bankruptcy plan.
There are also some restrictions on cramming down recently acquired debt. You can only cram down auto loans if you purchased the car more than 910 days before you file. For other personal property, you can only cram down loans that you purchased at least one year prior to the filing for bankruptcy.
Chapter 13 Discharge Broader than Chapter 7
There are some debts that you can discharge in a Chapter 13 bankruptcy that you cannot discharge in a Chapter 7. The following debts may be discharged in a chapter 13 but not in a Chapter 7.
- Debts for willful and malicious injury to property.
- Debt incurred to pay nondischargeable taxes. If you take out a loan or use your credit card to pay taxes that would be not be discharged in a bankruptcy you can discharge these in a Chapter 13 but not a Chapter 7.
- Debts from a divorce or separation agreement, but not domestic support obligation such as alimony or child support.
- Debts from a previous bankruptcy where a court denied your discharge.
- Fines and penalties owed to the government other than criminal fines.
- Retirement account loans where you made loans to yourself from your retirement account. However, it may be advisable to continue to pay yourself back through the Chapter 13 plan.
Bankruptcy is complex and many answers depend upon your specific situation. If you still have questions you can schedule a free consultation with a bankruptcy attorney.