The Chapter 13 Plan
In a Chapter 13 bankruptcy case, a debtor puts forward a plan to repay certain creditors over a period of time, usually from future income. This may be an attractive option for someone looking to catch up on a mortgage or car loan without the threat of foreclosure or repossession. Additionally, most debtors are allowed to keep both exempt and non-exempt property. A Chapter 13 confirmed repayment plan will create an affordable monthly payment towards secured and unsecured debt typically over a three to five year period. Once the final payment is made, the plan is successfully completed and a debtor will receive a discharge of the balance of their eligible unsecured debt. Chapter 13 offers many of the same financial benefits and protections when a Chapter 7 case is not a feasible alternative.
When a Hardship Discharge is Possible
However, it is not uncommon once the plan has been confirmed for there to be a change in personal circumstances. Financial challenges may arise in successfully completing the original plan. The "hardship discharge" addresses the scenario where those situations may arise. When appropriate, a hardship discharge will only be granted by the court after the required notice has been given followed by a court hearing establishing that the three necessary elements have been met.
First, It's Not Your Fault
The failure of a debtor to complete the plan payments are due to circumstances beyond their control. In other words, the inability to complete the plan must be a result of circumstances which a debtor should not be held accountable. Typical examples include job loss, separation, injury, illness or death.
Second, Creditors Have Received Their Legal Share
Chapter 13 creditors must have received at least what they would have received in a hypothetical Chapter 7 liquidation case. Bankruptcy exemption rules dictate a threshold amount which creditors would be entitled to in a hypothetical Chapter 7 distribution. In order to receive a hardship discharge, the Chapter 13 creditors must have received at least that amount in the Chapter 13 plan so far.
Third, Any Modification Would Be Meaningless
Modifying the current Chapter 13 plan is not practically possible. If the cause of the hardship is merely temporary, there can be extensions of the plan or modifications of the payment amounts. In this is the case a hardship discharge would not be available. The circumstances must show that even taking into consideration any modifications of the plan, they would be meaningless and would do virtually nothing to cure the problem.
Hardship Discharge vs. Standard Discharge or Chapter 7 Conversion
The hardship discharge is more limited in scope than a standard Chapter 13 discharge and doesn't apply to any debts that would be nondischargeable in a Chapter 7 case. This includes debt for willful and malicious injury to property, those to pay nondischargeable tax obligations and ones arising from divorce or separation settlements. In the majority of cases courts are reluctant to grant hardship discharges and trustees in many circumstances would prefer the case be converted to a Chapter 7 bankruptcy instead. Under the right circumstances, however, a hardship discharge is an attractive option. A Chapter 7 conversion vs. a hardship discharge decision possess many legal advantages and disadvantages. Which one to pursue should be made only after having consulted with an experienced bankruptcy attorney in your state.The hardship discharge is more limited in scope than a standard Chapter 13 discharge and does not apply to any debts that would be nondischargeable in a Chapter 7 case.