Chapter 13 Offers More Flexibility in Bankruptcy than Chapter 7

Way back in 2005, President Bush signed into law the 2005 Bankruptcy Reform Act, officially known as the Bankruptcy Abuse Prevention and Consumer Protection Act. One of the stated missions of the “new” bankruptcy laws was to reduce the presumed abuse of Chapter 7 (“liquidation”) bankruptcy and encourage more people to file Chapter 13 (“reorganization”) bankruptcy. Eleven years on, the results are mixed. More often than not, our clients begin the process with the thought in mind that Chapter 7 is the best option for them. However, it is worthwhile to remember that Chapter 13 will still discharge more debts than Chapter 7, and offers more flexibility during the course of the case. In fact, the Chapter 13 discharge is still an effective solution for several types of debts which cannot be discharged in Chapter 7.

Debts which can be discharged in Chapter 13, but not in Chapter 7, include the following:
• Willful and malicious torts, if not reduced to judgment;
• Marital property settlement debts not in the nature of support;
• Debts from a prior chapter 7 case in which a discharge was denied;
• Restitution, unless convicted of a crime; and
• Debts incurred to pay non-dischargeable income taxes.

Among other things, the 2005 Bankruptcy Reform Act removed debts described in sections 523(a)(2) (fraud or false pretenses) and section 523(a)(4) (fraud, embezzlement, or larceny) from the scope of the Chapter 13 discharge, but only so long as a complaint is timely filed by the creditor seeking a non-dischargeability ruling. Rule 4007(c) of the new Bankruptcy Rules of Procedure fixes the deadline for such complaints as sixty days from the date first established for the meeting of creditors.

Even more common, and pertinent to many of our clients, is that recent debt division in a divorce proceeding may be discharged in Chapter 13 despite what the final divorce decree says. This is a very fitting option for a recent divorcee who, perhaps, did not get a fair “deal” once the divorce was finalized and ended up with a mountain of debt assigned to them that cannot realistically be paid off. If you have questions about this scenario it is recommended you consult with a qualified bankruptcy attorney at Pollak, Hicks & Alhejaj, and bring a copy of your decree with you for analysis.

Regardless of your specific situation, the wise bankruptcy practitioner will have his or her clients consider filing Chapter 13 cases, when appropriate, and may find more relief there than in Chapter 7.

Wesley H. Bain, Attorney at Law

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