What Debts are Discharged after Chapter 13 Bankruptcy?

What happens after Chapter 13 bankruptcy? Are you fully debt free? Which of your debts will be discharged? Fortunately for the majority of debtors, the answer is, "most." In fact, it's easier to ask what debts are not discharged than to ask which ones will be.

What Bankruptcy Does

Bankruptcy allows a debtor to discharge, or eliminate debts. The idea is to give the debtor a fresh start. However, to be fair, creditors are still paid as much as they can be—either by liquidating the debtor’s assets and distributing them to creditors (Chapter 7) or by establishing a payment plan to pay as much over time as the debtor can afford (Chapter 13).

The Default is that Debts are Eliminated

There are certain debts that can’t be discharged under law (or at least not easily). There are also some debts that must be paid, or else any property securing them (acting as collateral) can be taken by the lender. However, with those exceptions, all debts can be freely discharged in bankruptcy, and that includes:

Consumer debt, such as credit card debt and store accounts
Medical, dental, hospital, therapist, etc. bills
Money owed to service people, to contractors, and to professionals

Debts that Can’t be Discharged at All (or Only in Special Circumstances)

There are some debts that the law either doesn’t permit debtors to discharge in Chapter 13, or which at least it makes very difficult to discharge. The main ones are:

Alimony and child support
Many taxes
Student loans
Fines for criminal restitution
Debts arising from DUI

Treatment of Secured Debt in Chapter 13

Secured debts are debts that have property acting as collateral. If the debt is not paid, then even if the debtor declared bankruptcy, the property can be taken. The bankruptcy will stop the creditor from going after the debtor for additional amounts owed—e.g. any balance left after the repossessed or foreclosed property is sold at auction—but it doesn’t necessarily preserve the property itself. However—and this is a huge advantage to many debtors—in many cases, the bankruptcy court can do a “cram down” reducing the amount owed on secured debt (and therefore the payments based on that principal balance) to the then-current market value of the property. This can’t be done for a debtor’s primary residence—so you have to pay your mortgage or lose your home—but it can be done for investment real estate, cars, boats, and most other property which has a secured loan on it.

How an Attorney Can Help