What is a Hardship Discharge in a Chapter 13 Bankruptcy and How Do I Qualify?

By Ryan C. Wood

What happens if you are in a Chapter 13 bankruptcy plan and something unexpectedly happens? You are no longer able to pay your Chapter 13 plan payment each month. Does this mean that your case will be dismissed and you will not receive a discharge of your debts? Not necessarily. There are several options for you if this happens. One option is to convert your case to a Chapter 7 (if you qualify) and receive a Chapter 7 discharge of your debts. This will mean paying a conversion fee to the courts and appearing for another meeting of creditors with the Chapter 7 trustee assigned to your case. Another option is to file a motion with the court to obtain a hardship discharge in your current Chapter 13 case. You need to continue to communicate with your bankruptcy lawyers after the Chapter 13 plan is approved/confirmed.

So what is a hardship discharge? Pursuant to 11 U.S.C. §1328(b), your debts may still be discharged if you are unable to continue making payments in your current Chapter 13 plan. You can only obtain a hardship discharge if you meet the following requirements:

(1) Your inability to complete the Chapter 13 plan is due to circumstances that are beyond your control. This may be due to unexpected illness, disability, medical condition, death, loss of job, or other circumstances.
(2) If your Chapter 13 plan payments have already paid your creditors at least what they would have received if you had filed a Chapter 7 bankruptcy. This may be an issue for people that have filed a Chapter 13 bankruptcy because they own assets that are too valuable to protect the full value. If you convert your Chapter 13 to a Chapter 7 bankruptcy the Chapter 7 trustee will want to liquidate unprotected assets and give the proceeds to your creditors. Therefore, if you had a house that had a lot of equity, then you may not meet this requirement.
(3) If a motion to modify your Chapter 13 plan is not practicable or possible. Normally, if you have a temporary illness or decrease in income, your bankruptcy attorney may help you modify your plan to reflect the circumstances. However, if the plan payments are already as low as legally possible in your Chapter 13 plan and you still are not able to modify your plan further, then it may be possible to seek a hardship discharge in your Chapter 13 case.

The hardship discharge will discharge all eligible debts. There are certain debts that will not be dischargeable, including: curing defaults on any secured or unsecured claims, priority tax debt (taxes that were due less than 3 years prior to the filing of your bankruptcy case, filed less than 2 years, or assessed less than 240 days), debts incurred due to misrepresentation or fraud, domestic support obligations, student loans, homeowner association dues that are due after the filing of your bankruptcy case if you are retaining ownership in the property, or for death or personal injury caused by operating a motor vehicle, boat, or aircraft while intoxicated. This is only a partial list of all the exceptions to discharge. For a more complete list, see 11 U.S.C. §523(a).

Chapter 13 cases can be very complicated. It is advisable that you seek the services of an experienced bankruptcy attorney to help you through the process.