Here are the most common types of debt you can eliminate in Chapter 13 but not in Chapter 7.
It likely won't surprise you that if you purposefully set out to damage another person’s property, you’ll be stuck paying for it in Chapter 7. You can’t discharge a debt resulting from “willfully or maliciously” damaging property owned by someone other than yourself.
That’s not the case in Chapter 13. If you owe someone money because you harmed their property, you can wipe out the obligation under Chapter 13. However, keep in mind that you can’t eliminate any debts arising out of your willful or malicious acts that cause personal injury or death in Chapter 7 or Chapter 13 bankruptcy.
Learn about the debts you can discharge in Chapter 7.
Say you use your credit card to pay off a nondischargeable tax obligation, such as a recent income tax debt. You can discharge it in Chapter 13 bankruptcy but not in Chapter 7. Find out more about wiping out tax debt in Chapter 13.
Here's another surprising twist. If you owe money to your spouse, former spouse, or child as a result of a property settlement—usually an equalizing payment outlined in a divorce decree, marital settlement, or separation agreement—you can discharge it in Chapter 13 bankruptcy. However, domestic support obligations, such as alimony or child support, are not dischargeable in Chapter 7 or Chapter 13 bankruptcy.
Example. If a family court judge requires you to pay a joint credit card in your divorce decree, you have an obligation to your former spouse to pay off that debt. If you don’t pay off the card, the credit card company can sue your former spouse to collect the debt despite the divorce decree. If your spouse ends up paying the debt, he or she can come after you for reimbursement. In Chapter 7 bankruptcy, you can wipe out your liability to the credit card company for the joint debt – but not your obligation to your spouse under the divorce decree. But a Chapter 13 discharge wipes out your responsibility to your spouse as well as to the credit card company.
Find out more about support in bankruptcy.
If you filed for bankruptcy previously and the court denied your discharge, you can’t eliminate those same debts in a subsequent Chapter 7 case. However, you might be able to discharge the debts from your prior bankruptcy in Chapter 13 bankruptcy. Find out what it means to file a “bad faith” bankruptcy.
Any money you borrow from your retirement plan is essentially a debt you owe to yourself. These debts are dischargeable in Chapter 13 bankruptcy but not in Chapter 7. However, if you continue to make your loan payments during bankruptcy, you can reduce your disposable income and the amount you must pay unsecured creditors through your repayment plan. Because of this, as a practical matter, it is typically in your best interest to continue your retirement loan payments in Chapter 13 bankruptcy. Find out about 401k plans in bankruptcy.
Unlike Chapter 7 bankruptcy, Chapter 13 bankruptcy allows you to discharge condominium or homeowners association (HOA) dues that are incurred after your filing date. But your HOA typically has a lien on your property for any outstanding fees despite your discharge. If you want to keep your house, you should continue paying all of your HOA fees.
Chapter 7 bankruptcy doesn't eliminate most types of fines and penalties you owe to governmental entities. But fines and penalties payable to the government (other than criminal fines) are generally dischargeable in Chapter 13 bankruptcy.