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The end game in filing Chapter 13 bankruptcy is a discharge order signed by a judge that releases the debtor of all qualifying debts and prohibits creditors from attempting to collect debts once the case is finalized.
It’s not quite a diploma worthy of a wall–hanging, but a discharge order is an official paper that creditors must respect and one that symbolizes a new beginning.
So long as the creditor meets the terms of a well-orchestrated repayment plan.
A repayment plan in a Chapter 13 bankruptcy takes 3-5 years. The Chapter 13 bankruptcy discharge order typically follows shortly after you complete the repayment process.
“I see too many people throw small rocks or pebbles at the debt problem when what they really need is a comprehensive solution to eliminate debt completely,” Adrienne Hines, an Ohio bankruptcy and worker’s comp lawyer, said. “Bankruptcy is a comprehensive solution that I recommend more often than not.”
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy is commonly called wage earner’s bankruptcy. It’s an option for people who might prefer a quicker, cleaner Chapter 7 liquidation but who make too much money to qualify for it. Or for people who don’t want to risk losing a house or car or face wage garnishment.
A Chapter 13 bankruptcy is a plan that allows individuals with steady incomes to repay all or part of their debt over a period of 3-5 years.
The period of time attached to a particular repayment plan in this type of bankruptcy is determined by whether the monthly income of the debtor is lesser or greater than the applicable state median income.
The repayment plan requiring installments to creditors cannot exceed five years, during which creditors must cease collection efforts.
What Is Chapter 13 Discharge?
Think of discharged debt as forgiven debt. A Chapter 13 discharge is a formal document signed by the bankruptcy judge that says you’ve successfully met the terms of your repayment plan.
It means that any remaining balances on your qualified debt are forgiven, and it’s a red-light-full-stop for creditors trying to collect debts.
Some debts, alimony and child support at the top of the list, do not qualify for forgiveness in either an ordinary discharge or what is known as a “hardship discharge,”
The Hardship Discharge in Chapter 13
You might argue that just filing for Chapter 13 bankruptcy suggests some degree of financial hardship.
But qualifying for a hardship discharge is a separate issue, possible only when unforeseen problems arise that compromise or eliminate a debtor’s ability to complete an established repayment plan. Even then, hardship discharges are rare when compared to regular discharges.
If your situation changes drastically while your case is progressing, you should contact an experienced bankruptcy attorney to determine if you qualify for an early discharge.
A hardship discharge requires that unsecured creditors already have received at least as much as they would have in a Chapter 7 liquidation and would only apply to your dischargeable, unsecured debt.
As discussed, non-qualifying debt such as child support, alimony, and most student loans wouldn’t magically disappear as part of a hardship discharge.
The Process of Chapter 13 Discharge
The process required in a Chapter 13 discharge includes specific steps that the debtor must follow:
- Credit counseling. This is an important preliminary step to help debtors explore and understand all options for eliminating debt.
- Preparation of a repayment plan. This is the plan you create to repay debts in exchange for forgiveness of certain debts and safeguards against repossession or foreclosure of property.
- Submission of the plan to bankruptcy court. A judge will examine the plan and decide whether it’s fair and legal.
- Working with a trustee. A court-appointed trustee, the middleman between you and your creditors, will distribute your payments to creditors based on clearly established priority.
- Certification that you have met all your domestic support obligations. Domestic support is a priority repayment that can’t be forgiven.
- Proving that you have not received a Chapter 13 bankruptcy discharge in the previous two years. You can file Chapter 13 multiple times in the course of your life, but there are time minimums between filing dates.
- Completion of a course in financial management. For obvious reasons, this is also known as debtor education.
- Discharge of the case. At the completion of your plan, which typically takes 3-5 years, the judge will discharge the remaining qualified debts.
- The issue of a discharge order. The discharge order in a Chapter 13 bankruptcy is also called “discharge papers.” It’s the formal document clearing you of debt that creditors must respect.
Debts That Aren’t Discharged in Chapter 13
The term “qualifying debts” is another way of saying some debts do not qualify for discharge in a Chapter 13 bankruptcy filing. Debts that won’t be forgiven include:
- Child support and alimony.
- Some types of student loans.
- Criminal fines.
- Long-term obligations like mortgages.
- Taxes, though some exceptions apply. See: tax debt in bankruptcy.
“In some cases, you can discharge tax debt in bankruptcy, but generally, you can only discharge income taxes that are more than three years past due,” Kari Brummond, an accountant with TaxCure.com, said.
“The age of the tax debt is based on the latter (between) when you filed the return or the due date.”
- Debts arising from death or personal injury in a DUI or any incident involving drug use and intoxication.
- Restitution or damages awarded in a civil case.
Speak to a Credit Counselor Before Filing for Bankruptcy
Individual creditors are required to get credit counseling from an approved agency within 180 days of filing for bankruptcy.
Credit counseling is an important preliminary step to help debtors understand their options, a precursor to the financial management program that must be completed during the bankruptcy process before a discharge order is issued.
Bankruptcy is not a one-size-fits-all solution. It carries serious credit score implications that should be taken into account along with a myriad of considerations, both financial and personal.
A free consultation with a nonprofit credit counselor could steer you toward a bankruptcy filing, if that’s your best option, but might also recommend a debt management program that better fits your needs.
Debt can overwhelm the best-intentioned people. Sometimes it’s gradual. Sometimes it’s the result of a single life event such as divorce, job loss or medical emergency. There’s no shame in seeking professional help.
