What is a Hardship Discharge in a Chapter 13 Bankruptcy?

In a Chapter 13 bankruptcy, a debtor is entitled to a discharge of debt when the debtor has completed the repayment plan. If circumstances arise which prevent the debtor from completing a plan, the debtor may be entitled to a hardship discharge.

The Chapter 13 Plan

A Chapter 13 debtor must repay creditors through a court-approved repayment plan. The plan lasts for three or five years. During the life of the plan, the debtor submits regular payments on a monthly or biweekly basis to the trustee who distributes the payments to creditors. The debtor can pay the trustee directly or make the payments through payroll deductions.

When a Hardship Happens

Sometimes a debtor is unable to complete a plan because of a change in circumstances. In these cases, a court can grant a debtor a hardship discharge. This may be available, for example, if the debtor lost their job or became seriously ill and unable to work. A bankruptcy court may grant a hardship discharge in the following cases:

The failure to complete the plan is due to circumstances beyond the debtor’s control or through no fault of the debtor;
Creditors have received at least as much as they would have received in a Chapter 7 bankruptcy; and
It is not possible to modify the plan.

Convert to Chapter 7

If the court refuses to grant a hardship discharge, a debtor may be able to convert to a Chapter 7 bankruptcy. A debtor can only convert if their income does not exceed the median income in their state or the debtor can pass the means test. If the debtor qualifies, the debtor is not required to repay unsecured creditors, but the trustee can take nonexempt property and sell it to pay unsecured creditors. If the debtor has equity in their home, the trustee may sell it and use the proceeds to pay unsecured creditors.

Get Your Case Dismissed

If a debtor is unable to convert to Chapter 7, the debtor can ask the court to dismiss the Chapter 13 case. This will mean that the debtor will still owe creditors for the debt and for interest charges that accumulated while the bankruptcy case was pending. If an automatic stay prevented a mortgage lender from proceeding with foreclosure, this will no longer prevent the lender from completing the foreclosure.

Bankruptcy is a complex legal process. If you have filed or plan to file for bankruptcy, consult with a bankruptcy lawyer who can help you ascertain what is best in your situation.

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