In general, insolvent individuals have the choice of either a chapter 7 or chapter 13 bankruptcy, each governed by the United States Bankruptcy Code. Chapter 13 of the Bankruptcy Code is titled "Adjustment of Debts of an Individual with Regular Income" and, if available to the debtor, comes with several advantages for the debtor and creditors. As a matter of public policy, chapter 13 reflects Congress’ legislative intent to promote, without mandating, over-leveraged individual debtors to use repayment plans to achieve debtor relief and creditor recoveries.
Principally, a chapter 13 bankruptcy allows a debtor with a regular income to "deal comprehensively with both unsecured and secured debts" through what is essentially a reorganization (In Re Bateman). Hence, it is very similar in concept to chapter 11 (In Re Childs). The goal of chapter 13 is to facilitate adjustments of all types of debts when the debtor is an individual with a regular income who can repay creditors with their future income. In addition to the regular income requirement, the debtor may not owe a total more than the statute’s maximum threshold (See: 11 U.S. Code § 109 - Who May be a Debtor) .
The benefit to creditors comes from discrete, ratable recoveries from the debtor’s future income, a stream of recovery otherwise unavailable in a chapter 7 liquidation. The benefit to the debtor is the avoidance of liquidation, which contributes to the debtor’s fuller extent of relief from insolvency. Critically, under chapter 13 the debtor preserves their ownership in existing assets, but only if the debtor completes the repayment plan.
A chapter 13 debtor is entitled to a discharge when all the payments under the repayment plan are completed and additional statutory requirements are met. These requirements include the following:
- The debtor (if applicable) certifies that all domestic support obligations that came due prior to making such certification have been paid.
- The debtor has not received a discharge in a prior bankruptcy case filed within two years for a prior chapter 13 case or four years for a prior chapter 7, 11 and 12 case; And
- The debtor has completed an approved course in financial management, if available to the debtor.
A discharge releases the debtor from all debts included in the repayment plan (or debts statutorily disallowed). Accordingly, when creditors are repaid under the plan, they are barred from initiating or continuing any collection action against the debtor to collect the discharged debts. The scope of the discharge depends on the type of debts the debtor owes. For instance, debts not discharged include home mortgages and debts for alimony or child support. However, the discharge in chapter 13 is broader than in chapter 7. Unlike a chapter 7 debtor, a chapter 13 debtor can discharge debts for willful and malicious injury to property, debts incurred to pay non-dischargeable tax obligations, and debts arising from property settlements in divorce or separation proceedings.
[Last updated in July of 2022 by the Wex Definitions Team]
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