A Chapter 13 debtor is entitled to a discharge upon successful completion of all payments under his or her Chapter 13 plan. By the time of the entry of the discharge, the debtor would have already completed the terms of the Chapter 13 plan. Monthly payments over a 3-5 year period would have been made to the Chapter 13 Trustee. Over the years, the trustee would have been making monthly distributions to creditors based on the terms of the Chapter 13 plan. The discharge is a court order that releases the debtor from all of his or her dischargeable debts.
General unsecured debts like credit cards, payday loans, and medical bills are discharged. In Chapter 13 general unsecured creditors receive a certain percentage of what is owed based on the terms of the confirmed plan. For instance, if American Express filed a claim for $10,000 and the plan proposed to pay general unsecured creditors 30%, then once the discharge is entered the remaining 70% of the outstanding balance is discharged regardless of accrued interest.
Certain debts are not discharged in Chapter 13. They include debts for certain income taxes, student loan debts, and domestic support obligations. The discharge also excepts “debtor wrongdoing debts” such as misrepresentation and fraud, embezzlement and larceny. Note that there are a few debts that are dischargeable in Chapter 13 but not in Chapter 7. These include debts arising out of willful and malicious injury committed by the debtor, property settlements arising out of divorce cases, and fines to a governmental unit. Criminal fines and restitution imposed as part of a criminal sentence are not dischargeable in a Chapter 13 case.
A debtor who has failed to complete payments under a confirmed plan may request the court to grant a “hardship discharge”. Note that it is hard to get a hardship discharge in the bankruptcy courts of California.
The discharge also imposes an “injunction” on creditors that prohibits any attempts to collect the debt from the debtor after the discharge is entered. A debtor can seek relief from the bankruptcy court for any discharge violation, including damages, attorney’s fees and possibly punitive damages.
If a debtor cannot complete his or her Chapter 13 plan, the debtor would need to convert the case to Chapter 7 and receive a discharge under that Chapter. Sometimes conversion is not an option and a debtor elects to dismiss a Chapter 13 case. Dismissal does not discharge any debts and debtor could be liable for all of the pre-bankruptcy debts.
Call David A. Arietta at (925) 472-8000 to go over questions about Chapter 13.