The majority of consumer New York bankruptcy cases are filed in chapter 7 rather than chapter 13, usually for understandable reasons. Debtors choosing chapter 7 probably have few assets, low incomes, and they are mostly looking to discharge unsecured debts. Although chapter 13 might not appear right for many, it does discharge some unsecured debts that a chapter 7 case will not.
The reason is that the Bankruptcy Code gives chapter 13 a separate section clarifying what debts it discharges, section 1328. A successful chapter 13 case can result in the discharge of all debts provided for by the plan subject to the exceptions it then lists. Wherever it does not overlap with section 523, which applies to chapter 7 cases, it clears several debts that chapter 7 will not.
Here are seven examples.
- “Willful and malicious injury by the debtor to another entity or to the property of another entity.” Section 1328(a)(2) identifies a handful of exceptions to discharge that appear in section 523. However, it omits section 523(a)(6), which covers “willful and malicious” acts of the debtor. This sets a pretty high bar, and it does not exclude debts created by similar acts that resulted in serious injury or death to another. (Section 1328(a)(4))
- Civil fines, penalties, and forfeitures (i.e. not taxes). This is the next exception listed in section 523(a) that chapter 13’s section 1328 excludes. This statute explicitly does not include debts for restitution or criminal fines that are included in a criminal sentence against the debtor. (Section 1328(a)(3))
- Debts from a prior bankruptcy that could not be discharged. Similar to the above, chapter 7 excepts these debts from discharge in section 523(a)(10).
- Debts incurred to pay taxes. Debtors sometimes borrow money on credit cards to pay tax debts hoping to discharge them in chapter 7, but section 523(a)(14) blocks them from doing so. In chapter 13, tax debts are priority debts that must be paid in full under the plan, but any unsecured debts debtors take out to pay them are dischargeable because section 1328(a)(2) does not refer to them.
- Non-support debts arising from a divorce. Normally chapter 7 forbids discharge of these debts via section 523(a)(15), but they are absent from section 1328. Note that support payments are still not barred from discharge, so non-support payments might be an unsecured debt created by a separation agreement.
- Debts arising from unpaid condominium or association fees. These are tricky. Section 523(a)(16) makes them dischargeable in chapter 7, and section 1328 does not mention them. Although, how chapter 13 ultimately resolves them depends on the debtor’s intent with respect to the condo or association. Debtors wishing to keep their units would need to repay accrued fees in full according to the plan, so their dischargeability does not matter. Conversely, debtors who intend to surrender their units would treat these debts as dischargeable unsecured debts. In a chapter 13 New York bankruptcy, some of this would be included in the plan, but the rest would be discharged upon completion. Click here for more information about condo or homeowners fees in bankruptcy.
- Loans made against retirement plans. These appear in section 523(a)(18). 401(k) loans can put New Yorkers deeper into debt, so it’s good the Bankruptcy Code allows debtors to discharge them if necessary.
Section 1328(a) excludes from discharge a handful of other types of loans that otherwise would not escape a chapter 7 case, but these are the most salient ones for most debtors.
If you are experiencing significant financial difficulties, whether chapter 7 can resolve them or not, then talking to an experienced New York bankruptcy lawyer can help you assess your options.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.
