While bankruptcy professionals groaned in dismay when Congress reduced the effectiveness of the chapter 13 “super discharge” with the 2005 Bankruptcy Reform Act, it is worthwhile to remember that chapter 13 will still discharge more debts than chapter 7. In fact, the chapter 13 discharge is still an effective solution for several types of debts which cannot be discharged in chapter 7. Additionally, creditors with otherwise valid nondischargeability claims are often failing to take advantage of their new rights, allowing more debts to be discharged in chapter 13 than was expected to be the case under the new law and rules.
Debts which can be discharged in chapter 13, but not in chapter 7, still include the following:
- Wilfull 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 nondischargeable 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 nondischargeability 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. This deadline has given rise to an interesting phenomenon, confirmed by anecdotal evidence shared among consumer bankruptcy lawyers: creditors are rarely filing such complaints in chapter 13 cases, even when grounds for such complaints have existed.
Regardless of the explanation for this lax creditor attitude, the wise bankruptcy practitioner will have his or her clients consider filing chapter 13 cases, where section 523(a)(2) or (4) complaints could be expected if a chapter 7 were filed, in the hopes that the affected creditors will fail to object on time. This means that bankruptcy debtors with heavy credit card usage, or large balance transfers, occurring immediately before the case is filed, and who might expect chapter 7 to result in nondischargeability complaints, with a little luck may find relief in chapter 13.