The Chapter 13 Discharge

A Chapter 13 bankruptcy discharge is a very powerful thing. It stops your creditors from pursuing discharged debts permanently. But it can also be confusing. Let’s answer some of the common questions about the Chapter 13 discharge.

What does a Chapter 13 discharge mean?

A “discharge” is the fancy legal term for your debts being forgiven in your bankruptcy. When we talk about debts forgiven in bankruptcy, we would say that your debts are discharged. The Chapter 13 “discharge order” is the final order you receive in your Chapter 13 bankruptcy. It is signed by the bankruptcy judge assigned to your cases and states clearly that you have received a Chapter 13 discharge. In other words, it is the formal document that releases you of your debts.Some people refer to the order less formally such as “discharge papers”.

What is a hardship discharge in Chapter 13?

We should note that there are two types of discharge under Chapter 13. The first is the ordinary discharge granted upon completion of plan payments. This is called a Section 1328(a) discharge. The second is called a “hardship discharge” and is sometimes called a Section 1328(b) discharge. The hardship discharge is far less common. The vast majority of Chapter 13 discharges are granted upon completion of plan payments under Section 1328(a).

What does my Chapter 13 discharge order look like?

While every court is slightly different, the Chapter 13 discharge order looks similar. It is signed by a judge and states that “A discharge under 11 U.S.C. § 1328(a) is granted to: Your Name”.

Image: Sample Chapter 13 Discharge Order


What is a Chapter 13 discharge injunction?

Once you get your discharge, your creditors are “enjoined” from pursuing the debt. That means that the court has ordered them to stop collection activity. If your creditors ignore this order, you may be able to get damages caused by their actions. We typically see this in cases where debt collection companies continue to send payment demands even though the person received the discharge. In these cases, we have sued the debt collectors and won. The discharge is serious and debt collectors should respect it.

Is debt discharged in a Chapter 13 taxable?

No! One of the greatest things about bankruptcy is that your debt is discharged tax free. If you were to settle your debt with your debt collectors, you would receive a 1099 at the end of the year. You would have to pay tax on any money forgiven by the debt collector. In bankruptcy, the discharge makes it so that the debt forgiveness is not taxable.

I got a 1099 from my creditor even though my debt was discharged in bankruptcy. What do I do?

This happens. It’s an accounting issue for the creditor. No worries though. You can simply complete an IRS Form 982 when you complete your tax returns to explain you have a bankruptcy discharge. If you file this form, you won’t have to pay tax. If we file your taxes for you, we will do this for you so you don’t have to worry about it.

When will I get my discharge?

We discuss the timeline in the Chapter 13 bankruptcy process, but generally, you will receive the discharge order about 1-3 months after completing your Chapter 13 plan payments. The length of your Chapter 13 plan varies from case to case. In most cases, the plan length is between 3-5 years.

What debts are dischargeable in a Chapter 13 bankruptcy?

Most debts are dischargeable in Chapter 13 with a few exceptions. So we generally start by assuming the debt is dischargeable unless an exception applies. The common exceptions to dischargeability are:

The Chapter 13 discharge is far more comprehensive than the Chapter 7 discharge. Far more debts are dischargeable in Chapter 13 than in Chapter 7.

Image: Chapter 13 Dischargeability Guide. Most debts are included in the Chapter 13 discharge with limited exceptions.

Can a Chapter 13 discharge tax debt?

Yes, in some cases. The tax dischargeability rules are very complex. Generally, we can discharge income taxes due more than three years ago provided that the returns were filed more than two years ago.

However, we know the ins and outs of tax dischargeability – not only from the bankruptcy side, but also from the tax resolution side. When we have a client with tax issues, we first perform a full tax dischargeability analysis. We determine which tax debts are dischargeable and which tax debts are not. We would then develop a strategy for dealing with the non-dischargeable tax debts. Sometimes, we can use non-bankruptcy options such as an Offer in Compromise or a financial hardship plan. Other times, we can simply pay the non-dischargeable taxes through the Chapter 13 Plan.

Can a Chapter 13 discharge student loans?

Yes, in some cases, you can discharge student loans in Chapter 13 bankruptcy. A common misconception, amongst both student loan borrowers and attorneys, is that student loans cannot be discharged in bankruptcy. This is absolutely not true. Both federal and private student loans can be discharged in bankruptcy.

To be clear, the default rule is that student loans are not dischargeable, but there are exceptions to this rule. Although this can be difficult, we have the experience and knowledge to craft arguments that best fit your situation.

Generally, if we’re trying to discharge student loans in bankruptcy, we would use one of the following exceptions to the rule:

  • Undue Hardship: The standard for discharging student loans through bankruptcy is that the debt will impose an undue hardship on you and your dependents. The test used by most courts is known as the Brunner test and this test looks at three factors that are generally very subjective.
  • Non-Qualified Educational Loan: The Bankruptcy Code requires private student loans to be “educational loans”, which differ from other types of consumer debts, and be incurred solely for higher education expenses.
  • Eligible Student: An additional requirement for a qualified educational loan is that the private student loan borrower is an eligible student during the period of the loan. Some factors of an eligible student include being a US citizen or eligible non-citizen and enrollment in an eligible degree.
  • Eligible Institution: The college or university at which a private student loan borrower is enrolled must be an eligible institution. It is important to look for institutions that are unaccredited.

Additionally, we have seen great success with dealing directly with the Department of Education’s Administrative Discharge Application. In most cases, this is a cheaper and better option. For example, if you are permanently disabled, you would likely qualify for an administrative discharge more easily than a bankruptcy discharge.

If student loans are a concern for you, you should speak with a student loan lawyer in our office. That way we can address your specific situation to determine if your student loans are dischargeable.

Can a Chapter 13 discharge child support?

No. Child support cannot be discharged. However, if you are simply seeking relief from collection on child support arrears, a Chapter 13 bankruptcy can provide for a comfortable repayment plan. The arrears must be paid in Chapter 13, but you would have up to five years to repay them and in the meantime, collection activity would be stopped.

Can a Chapter 13 discharge divorce settlements?

Yes! Unlike a Chapter 7 discharge, a Chapter 13 can discharge divorce settlements or divorce awards. The caveat here is that if the divorce settlement is for support or maintenance, the bankruptcy court may treat it like alimony and may find it non-dischargeable. It really depends on the nature of the settlement.

Does a Chapter 13 remove negative items from my credit report?

Yes! One of the best parts about Chapter 13 bankruptcy is that negative items are removed from your credit report. This allows you to build credit quickly after your Chapter 13 plan confirmation. We’ve discussed this in our article “what does bankruptcy do to my credit?” Many times, your credit report begins to show these items as removed within a month or two of filing bankruptcy. This causes many of our clients to see their credit score go up as much as 50 points after filing a bankruptcy!

Will a Chapter 13 discharge remove a foreclosure from my credit report?

Yes! A Chapter 13 will remove any negative items regarding your foreclosure. It will remove the indication of the foreclosure itself, but also the missed payments leading up to the foreclosure. The Chapter 13 will also prevent you from being sued for a “deficiency judgment” and will prevent you from being taxed on any deficiency that is forgiven.

Will a Chapter 13 discharge remove a vehicle repossession from my credit report?

Yes! A Chapter 13 will remove any negative items regarding your repossession. It will remove the indication of the repossession itself, but also the missed payments leading up to the repossession. The Chapter 13 will also prevent you from being sued for a “deficiency judgment” and will prevent you from being taxed on any deficiency that is forgiven.

Moreover, a Chapter 13 can help you save a car from repossession! A Chapter 13 allows you to repay missed car payments through the Chapter 13 Plan. Or if you’d prefer, you can get a new car loan! It’s unbelievable to a lot of my clients, but as soon as your Chapter 13 plan is confirmed, you may be able to get a new car loan.

Will a Chapter 13 discharge remove a judgment from my credit report?

Yes! A Chapter 13 removes judgments from your credit report. If you are subject to a judgment lien, you may need to “avoid” the lien through the Chapter 13 Plan in order to remove it completely. Your Chapter 13 bankruptcy attorney can discuss this with you and determine if you qualify for lien avoidance.

What happens to liens in a Chapter 13?

The general rule is that liens are retained in Chapter 13. That means if you have a consensual lien such as a mortgage or a car loan, the lien stays attached to the property. There are exceptions though:

  • You can sometimes “avoid” liens in Chapter 13. This means you can remove the lien.
  • You can sometimes “strip” liens such as second mortgages in Chapter 13. That means that the debt is treated as unsecured and is satisfied upon discharge.
  • As it pertains to vehicles, you can sometimes “cram down” liens and pay less than the full amount.

The lien rules are complex, but Chapter 13 gives you a number of solutions to deal with liens.

What happens to my mortgage in Chapter 13?

The fact that the lien stays attached to the property leads us in an interesting position. Technically, you no longer owe the debt. The bank can never sue you for defaulting on your mortgage. On the other hand, if you want to keep the house, you will need to pay the mortgage. If you don’t pay the mortgage, the bank can still foreclose even though the debt is discharged.

If you wanted to walk away from the house without paying the mortgage, you can. Since the debt is discharged, you will never be sued for a deficiency judgment. The bank will foreclose on the home, but will not ask you to pay.

What happens to my car loan in Chapter 13?

Much like with mortgages, the fact that the lien stays attached to the property leads us in an interesting position. Technically, you no longer owe the debt. The bank can never sue you for defaulting on your car loan. On the other hand, if you want to keep the car, you will need to pay the loan. If you don’t pay the car loan, the bank can still repossess it even though the debt is discharged.

That being said, there’s also some magic available in Chapter 13 with regard to vehicles. In some cases we can “cram down” a car loan. That means that if your car is worth less than the balance of the loan, you can elect to pay the value of the car rather than the loan balance. Since cars depreciate quickly, we can usually save you quite a bit of money on car loans in a Chapter 13. Moreover, even if you are not eligible for a “cram down” we can still elect to pay your car loan through the Chapter 13 plan. This can save you significant money on your loan and your monthly payments. Or if you’d prefer, you can surrender your car and we can work with you to get you a new one.

What happens to your car loan depends on how you draft your Chapter 13 plan. We discuss this more at length in our article “what is a Chapter 13 plan?

What happens to tax liens in Chapter 13?

Tax liens survive Chapter 13. If the tax debt was dischargeable, the IRS will never try to collect on the debt, but the lien will stay attached to your property.

If you have a tax lien, pre-bankruptcy planning becomes invaluable. We can employ some advanced strategies to remove the liens prior to filing the bankruptcy. You can then file your bankruptcy and have the tax debt discharged.

Alternatively, you can elect to pay the lien through the Chapter 13 Plan. You are generally not required to do that though.

Tax debts in bankruptcy are complex. Most bankruptcy attorneys do not even understand them. Since we are also tax resolution attorneys, we deal with the IRS all the time. If you have a tax issue, we will have a discussion about your tax debt prior to filing the bankruptcy.

Can my Chapter 13 bankruptcy be denied?

Not really. At least not in the sense people think of. It would not be your “bankruptcy” that is being denied. However, a Chapter 13 discharge may be denied in a few situations.

First, in order to get a Chapter 13 discharge, you need to draft a Chapter 13 plan that meets all of the requirements of Chapter 13. The judge needs to then approve this plan at a Chapter 13 confirmation hearing. You then have to make your payments under the plan. If you fail to file a confirmable plan or fail to make your payments, your case may be dismissed and you would not get a discharge.

Second, you may also be denied a discharge if you filed the bankruptcy in bad faith.

Third, certain types of debts may also be deemed “non-dischargeable”. That means those specific debts are not discharged and must be repaid.

It’s also worth noting that there is a debt ceiling in Chapter 13. This is a maximum amount of debt you can have and still be eligible for Chapter 13. If you have too much debt, you may not be eligible.It’s very high though so we don’t see people hit it that often. As of May 2023, the adjusted debt limits to qualify for Chapter 13 is $2,750,000. But even if you hit the ceiling, that doesn’t mean your bankruptcy will be denied. It just means Chapter 13 is the wrong chapter. You may be better served by Chapter 7 bankruptcy or Chapter 11 bankruptcy. Those chapters do not have a debt ceiling.

If you would like to estimate your Chapter 13 monthly plan, you can use the free Chapter 13 calculator below and get a free bankruptcy consultation.