File Chapter 13 If Not Eligible for Discharge In Order To Force Creditors Into An Affordable Repayment Plan
One of the interesting options that a Chapter 13 bankruptcy offers is the possibility of filing a Chapter 13 even if you are not eligible to receive a discharge of the balance of the debts that are not paid through the Chapter 13 payment plan.
Why in the world would I do that, you ask? It’s a useful option for a couple of reasons.
Chapter 13 If Not Eligible For Discharge: How Chapter 13 Works
First, remember that a Chapter 13 Bankruptcy is essentially a 3-5-year payment plan in which you pay your debts to the extent that you can afford to pay them. You make a monthly payment each month that is the equivalent of your net monthly income, after basic household and other expenses are taken into account. With that monthly payment, the Chapter 13 Trustee, who is the person that you send your payment to each month, pays your creditors in a priority order establish by the US Bankruptcy Code: secured creditors (home mortgages, car loans) on top, contracts and leases and “priority” unsecured creditors (child support, tax debts) in the middle, and regular unsecured creditors at the bottom (credit cards, medical bills—every other debt that you may have).
Those last-in-priority unsecured creditors normally in a Chapter 13 bankruptcy receive only what is left over at the end of the 3-5-year plan, after the higher priority creditors have been paid. They only receive what is available in the “pot” at that point—and the balance of the unsecured debts that are owed are then discharged the same way they are in a Chapter 7 “liquidation” bankruptcy. Which is to say, you don’t have to pay them back, and the creditors can never pursue you for collections.
You are only eligible for a discharge in a Chapter 13 bankruptcy if you have not filed a prior bankruptcy within certain time-periods (two years for a prior Chapter 13 bankruptcy and four years for a prior Chapter 7). However, you can still file a Chapter 13, even if a prior case falls within this time-period if you need certain relief.
Why File Chapter 13 If Not Eligible For Discharge? Pay Only What You Can Afford To Pay
For instance, as I have written about previously, if you have discharged most of your dischargeable credit-card and other debt in a previous Chapter 7 but are still having difficulties with student loan or other non-dischargeable debt, a Chapter 13 will forces the creditor to stop all collections attempts and allows you to make payments to the creditor at a rate which can be significantly less per month than the creditor might garnish or take from you outside of the court-enforced Chapter 13. Likewise for tax debts or child support or spousal support arrearages. A Chapter 13 following a Chapter 7 in this way is sometimes called a “Chapter 20” bankruptcy by bankruptcy attorneys.
A Chapter 13, even without discharge, can still protect you from creditor harassment for 3-5 years and still repay a portion of your debt at a rate that is tailored to your necessary household budget.
The Chapter “20” Lien-Strip
Additionally, although case-law is pending around the country on this issue, more bankruptcy courts have been holding recently that a lien-strip (the removal and discharge of a second mortgage or home equity loan on a primary residence that is worth less than is owed on a first mortgage through Chapter 13) is allowed even in a Chapter 13 bankruptcy in which the debtor is not eligible for discharge.
Thus, if you desire a lien-strip in order to get rid of a second mortgage and decrease the negative equity in a house that you wish to save, but, initially, you have too much debt to quality for a Chapter 13 (in which there are, unlike Chapter 7, limits to the extent of the debt you are allowed to have), you might consider filing the Chapter 7 first in order to discharge the lion’s share of the unsecured debt, then a Chapter 13 bankruptcy after the Chapter 7 discharge in order to strip the second mortgage off of your house (which is not allowed at all in a Chapter 7).
This is not settled law here in the Eastern District of Michigan, where I practice, but the legality of this “Chapter 20” process is a hot issue, currently, in other courts around the country.
Chapter 13 If Not Eligible For Discharge: The Bottom-Line
In short, even if you have filed a bankruptcy within the past couple of years, if you are having difficulty with new, home mortgage, or non-dischargeable debt, a Chapter 13 may still be something to consider.
If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
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