Is it possible to get a hardship discharge in Chapter 13?

Asked 10 months ago - Lakeland, FL

I have been in chapter 13 since 2010 when I was working full time and earning $60,000 yr. My lawyer closed and reopened my case in 2012 in attempt to get my mortgage modification approved in a more favorable jurisdiction. This did not work however, I am still in chapter 13 as of the new case date 2012. I became disabled in 2011 and have not worked since that time but was in chapter 13. My income has now been reduced to my social security payments of $1900/month. My payments to the Trustee are $1055/month. I have no other income. I do have some company stock $10,000 and $2500 savings. I am single. My loan modification just now went through. I asked about chapter 7 but was informed I would have to lose the stock and savings. I have 20 more months in chapter 13.

Attorney answers (7)

  1. Richard Glenn Elie

    Contributor Level 20

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    Answered . You should talk to a seasoned bankruptcy practitioner in your area.

    This is really a very tough question to answer. You have a home, so you are claiming a homestead exemption no doubt.

    You are disabled.

    So all you have now is stock about $10,000 and savings of $2500.

    You may or may not be able to get a Ch. 13 hardship discharge, and if you miss any Ch. 13 plan payments, you would either end up dismissed or in a Ch. 7.

    Now to answer your question you may move for a hardship discharge. 11 U.S.C. § 1328(b) provides for this. Generally, this relief is only available if:

    (1) Your failure to complete plan payments is due to circumstances beyond your control and through no fault of your own; and

    (2) Creditors have received at least as much as they would have received in a chapter 7 liquidation case; and

    (3) A modification of the existing Ch. 13 plan is not possible.

    In order to be successful, you have to be able to prove that the chronic injury or illness that precludes you from gaining employment thereby any income that you have is insufficient to fund even a modified plan.

    Here, you only have your SS income due to disability. That income is theoretically exempt from creditors under state and federal law.

    The sticking point is the $10,000 in stock and $2500 in savings. Now for the real important question: Is the stock in a 401(k) or some other retirement plan? If so, then you will likely qualify.

    The hardship discharge is more limited than the discharge in a Ch. 7 or even a completed Ch. 13 case. It will not appy to any debts that are non-dischargeable in a chapter 7 case. See 11 U.S.C. § 523.

    As I understand it in Florida you have a $4,000 wildcard and $1,000 personal exemption for personal property (which includes stock), but ONLY if you do not claim an exemption in your homestead. If the stock is a 401(k) or other retirement plan asset, then it is likely exempt and not a problem. You could use the 2500 dollars to fund the attorney's fees for the hardship discharge with your lawyer.

    If your home is underwater, or you owe more than what its worth, even after the loan modification, then there is a possibility you can deliver a "poison pill" to the trustee in a Chapter 7. That is the trustee gets the home, but can do little with it because it has no equity, so the trustee abandons it. Meanwhile you secure your wildcard exemptions to keep your savings.

    In the interim, however, if there are any judgments out there, they will attach as liens to your home if you abandon the homestead exemption.

    In a situation like this, if your stock is non-exempt, I would have to say file a motion to sell the stock and pay the proceeds towards your Ch. 13 plan. Use your SS income to support yourself and make the mortgage payments, and when you have run out of that, use the savings to pay to fund the motion for Hardship Discharge or convert to a Ch. 7 through your attorney. By then you will have no stock or savings, and can assert your personal exemption, your homestead exemption and any automobile exemption if you own one, and wipe out any remaining debts. If there are judgment liens, your lawyer can have them removed if you retained your homestead exemption throughout the case..

    Otherwise this is really a terrible spot you're in.

    This is a public forum. Any questions or answers published here should not be construed as the giving or receiving... more
  2. Steven Patrick Taylor

    Contributor Level 11

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    Answered . A hardship discharge is available under Section 1328; however you must meet what is called the liquidation test which is that your unsecured creditors must receive as much as they would have received had you filed a Chapter 7 bankruptcy in 2010 (instead of a Chapter 13). To that end, you would look at the value of your non-exempt assets less the Chapter 7 Trustee fees and possibly liquidation costs; this is the amount that must be paid to the unsecured creditors. This amount may be paid via the plan payments or by lump sum from your existing liquid assets as a last payment.

    You may also want to consider doing a loan modification. There is substantial case law that states that a 1329 modification is not governed by the means test and can be less than 5 years in plan life. This may be preferable as the discharge would be more expansive upon completion than a hardship discharge. In either event, this is something you need an experienced attorney to navigate and advise you as to the structure and benefits of your options.

    Good Luck

  3. Hermin A. Dowe

    Contributor Level 13

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    Answered . it is vitally important that you speak with your attorney regarding your situation. It is obvious that with your present income you cannot maintain your payments. Depending on whether your stocks and savings were exempted in your original filing you may not lose them if you convert to a Chapter 7.

    Remember that on this forum attorneys try to answer your questions with limited facts available to them. My... more
  4. Nikhilkumar Manharlal Patel

    Pro

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    Answered . Unfortunately it is impossible to answer your question without a thorough examination of your case. I would set up an appointment with your attorney and talk to him/her about your issues. If you are not satisfied or want a second opinion you try to consult with an attorney in your area. If you think services are not adequate then you can always change attorneys. But sometimes, the situation does not leave you too many options. Therefore, I would recommend you meet with your attorney or firm, and then maybe consult with other firms in your area. Good luck!

    The asking of and answering general questions does not establish an attorney-client relationship. Please consult... more
  5. William Joseph Kopp Jr.

    Contributor Level 12

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    Answered . Do you know the reason that you are in 13? If it is to pay to keep all of your assets, then no, that will not work. If it was because of your income, then you could just modify the plan down to somewhere that you can make the payments.

  6. Charles Thomas Stohlman

    Contributor Level 3

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    Answered . Getting a Chapter 13 Hardship Discharge
    If you can't complete your Chapter 13 Bankruptcy plan, you might be able to get a discharge anyway.

    If you cannot complete your Chapter 13 repayment plan, you can file a motion with the bankruptcy court asking for a hardship discharge.

    Requirements to Get a Hardship Discharge
    The court will grant your request for a hardship discharge only if three conditions are met:
    • You failed to complete your plan payments due to circumstances “for which you should not justly be held accountable.” Your burden is to show the maximum possible misery and the worst of awfuls—that is, more than just a temporary job loss or temporary physical disability. Proving that your condition is permanent is usually key; you may need to bring medical evidence to court.
    • Based on what you have already paid into the plan, your unsecured creditors have received at least what they would have received if you had filed for Chapter 7. (This is typically a hard condition to meet unless you have little or no nonexempt property.)
    • Modification of your plan is not practical. To meet this requirement, you do not have to file a motion for modification and lose it; you just have to show the bankruptcy court that you wouldn’t be able to make payments even under a modified plan.
    Hardship Discharges: Debts That Are Not Discharged
    If the court grants your motion for a hardship discharge, only unsecured, nonpriority, dischargeable debts are discharged. The following debts typically are not wiped out in a hardship discharge:
    • priority debts
    • secured debts
    • arrears on secured debts
    • debts you didn’t list in your bankruptcy papers
    • student loans
    • most federal, state, and local taxes, as well as any amounts you borrowed or charged on a credit card to pay those taxes
    • child support, alimony, and debts resulting from a divorce or separation decree
    • fines or restitution imposed in a criminal-type proceeding
    • debts for death or personal injury resulting from your intoxicated driving
    • debts for dues or special assessments you owe to a condominium or cooperative association
    • debts you couldn’t discharge in a previous bankruptcy that was dismissed due to fraud or misfeasance, and
    • debts you owe to a pension, profit-sharing, stock bonus, or other plan established under various sections of the Internal Revenue Code.

    Hardship Discharges: Debts That Are Not Discharged If the Creditor Successfully Objects
    Some debts will be discharged in a hardship discharge unless the creditor files a successful objection to the discharge in court. These debts include:
    • debts incurred through your fraudulent acts, including using a credit card when you knew you would be unable to pay the bill
    • debts from willful and malicious injury you caused to another person or property, and
    • debts from embezzlement, larceny, or breach of trust (fiduciary duty).
    If you have a debt that falls into one of these categories, your best strategy is to do nothing and hope the creditor does the same. If the creditor objects, the court will examine the circumstances in which you incurred the debt to determine whether or not it can be legally eliminated. If you want the debt to be discharged, you should respond to the creditor’s objection.

  7. Arthur Wemegah

    Contributor Level 15

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    Answered . There is no hardship discharge in bankruptcy. You can have your case dismissed which will result in you still being liable for your debts or you can convert to 7 and you will have to liquidate your stock. The best option is to finish the chapter 13 or go with a dismissal and try to work out settlements with your remaining creditors.

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