A debt installment agreement (also called a debt consolidation plan or debt repayment plan) is a form of debt restructuring under the United States Bankruptcy Code, provided in Chapter 13. It is often used by a consumer with financial difficulty (such as excessive or unmanageable debt) and poor credit history to avoid repossession of her property.
History
When the Bankruptcy Code was written, secured debt (e.g. debt held by a car loan or credit card) was treated differently than unsecured debt (e.g. a credit card). The Bankruptcy Code at the time would discharge debt that was a form of personal property (including motor vehicle loans, mortgage loans, and credit card debt).
As personal property could be repossessed through foreclosure of the debt’s collateral, the Bankruptcy Code also protected debtors from eviction of their household property (e.g. home or rental property). If debtors entered bankruptcy, they were released from their debts and protected by the courts (the exception being unsecured debt, such as credit cards).
There was a belief that allowing Chapter 13’s discharge of personal property debt was the right thing to do, since it allowed debtors to rebuild their lives by freeing them from personal debt. In addition, allowing debtors to keep their homes and car was thought to be the right thing to do, since allowing them to go into Chapter 7 and lose their possessions would encourage a poor debtor to just walk away from their creditors.
In 1985, Congress passed the Tax Reform Act of 1986. This act was intended to “dramatically overhaul” the bankruptcy code, because it eliminated many of the most egregious bankruptcy abuses, such as the “fresh start” of Chapter 7. Specifically, it abolished the Bankruptcy Act’s discharge of secured and unsecured debt.
Thus, debtors would continue to be obligated to repay their debts, but could no longer use the court system to discharge those debts. A major result of this act was that Chapter 7 (an exemption of personal property), now required payment of all debts, whereas Chapter 13 (an exemption of personal property) was no longer available to people with substantial income.
In 1994, the Bankruptcy Reform Act of 1994 (the Act) passed. The Act significantly altered and reformulated the bankruptcy code. Among the many changes it made was to alter the Code’s Chapter 7 discharge provision. Instead of eliminating debtors’ personal property exemptions, Chapter 7 now “superimposes” upon the pre-existing exemptions in Section 522(b).
This now results in the exemption not being applicable at all, if the debtor is a “home mortgagee” on the “collateral for a debtor’s principal residence.” Thus, the discharge is now available for some debt, such as auto loan debt, if the car is a “replacement vehicle” or “used car.” There is a “negative-amortization exception” that prevents the debt from being discharged, if the payments fall short of reducing the loan balance to zero. The effect is to allow a consumer debtor to stay current on a debt.
If all debts can be discharged, the debtor is left with a reduced ability to pay the non-exempt debts. This has resulted in a significant increase in consumer bankruptcy filings. This is most apparent in the case of student loans, where the discharge of those loans creates “undue hardship,” for which many students qualify.
For more details about tax debt installment agreements, call (888)489-4889 for a free consultation!