The good: you can discharge one more important type of debt. The bad: no discharge of any debts until successfully finishing the case.
As you try to decide between Chapter 7 and 13, one of the considerations (there are many others) is how these two options compare in their discharge (legal write-off) of your debts.
On the positive side for Chapter 13 is that it discharges a type of debts that Chapter 7 does not. So if you owe a lot of this type of debt that could be reason enough to choose Chapter 13.
The negative side for Chapter 13 is that the discharge does not go into effective until the very end of the case—usually 3 to 5 years after it is filed. You have to successfully complete the payments and fulfill other requirements of your Chapter 13 plan to get a discharge of your debts. The reality is that a significant percentage of Chapter 13 cases do not finish successfully. So that’s something that you should seriously consider before filing a Chapter 13 case.
The Discharge of “Non-Support Divorce Debts”
Decades ago when the modern form of Chapter 13 was created, one way that Congress encouraged debtors to file Chapter 13s (and pay something instead of nothing to their creditors) was by allowing various kinds of debts to be discharged under Chapter 13 that could not be discharged under Chapter 7. Chapter 13 provided a “super discharge.” But over the years Congress has stopped making most of these types of debts that could be only discharged under Chapter 13 until now only one main one is left: non-support debts arising out of divorce.
Child and spousal support monthly obligations and arrearage cannot be discharged under either Chapter 7 or 13. However, financial obligations arising out of a divorce that are not in the nature of support can be discharged in only a Chapter 13 case. These tend to be two kinds of obligations, those requiring you 1) to pay off a joint marital debt on your own, or 2) to pay the ex-spouse as compensation for you receiving more than your share of the marital property. They are often called the “property settlement” part of your divorce.
If you owe a substantial amount of “property settlement” debt to your ex-spouse or to creditors for debt that accrued during the marriage, be sure to talk to your attorney about the potential benefits of discharging those debts through a Chapter 13 case. Because you would still owe them in full after a Chapter 7 case.
A Discharge Only at the End of the Case
In both Chapter 7 “straight bankruptcy” and Chapter 13 “adjustment of debts,” you don’t get a discharge of debts until the successful completion of the case. Under both Chapters you must satisfy a number of conditions before getting to the end of the case. But if you are an appropriate candidate for Chapter 7, its conditions are usually met relatively easily. So, most people who file consumer Chapter 7 cases get a court order discharging their debts about three months after filing the case.
It’s not quite so easy under Chapter 13. You have to meet many more conditions, and do so consistently over the course of years. This includes making monthly “plan payments” to your Chapter 13 trustee for distribution to your creditors, and often also sending payments directly to some creditors (usually vehicle and mortgage lenders). You also must stay current on spousal and child support obligations, file income tax returns on time, usually pay income tax refunds and other irregular sources of incoming money to the trustee, and meet other special requirements that may be laid out in your plan.
Your Chapter 13 plan will be designed so that you should be able to meet all its conditions and requirements. But sometime circumstances change during the course of the case so that you can’t meet the terms of the original plan. If so, usually your attorney will be able to modify the terms of your plan to account for the changed circumstances. Otherwise it may appropriate to “convert” your case into a Chapter 7 one and get a discharge of debts that way, or to dismiss the Chapter 13 case and start a new one case (for example, if you have new debts that you need to cover, or if your case exceeded the maximum time for it to finish). Or you may qualify for a “hardship discharge.”
Be sure you understand both the requirements of your hypothetical Chapter 13 plan and the options you’d have for changing it. That way you could make an informed judgment about the likelihood that you would finish your case and get a discharge of the debts remaining at the end of your Chapter 13 plan.