When You Should File a Hardship Discharge in a Chapter 13 Bankruptcy

The term "hardship discharge" is somewhat misleading--it implies that financial hardship is enough. However, it takes more than that; after all, you wouldn't have filed bankruptcy in the first place unless you were experiencing financial hardship. A hardship discharge requires circumstances beyond "mere" financial distress or inability to pay.

Chapter 13 Overview

In Chapter 13 (Individual Debt Adjustment) bankruptcy, a debtor is given a court-ordered repayment plan. Under this plan, which most commonly lasts five years, the debtor lives under a stringent budget, paying their disposable income (income less basic living expenses and certain mandatory obligations, like child support) to creditors. After paying for the appropriate amount of time, which ensures creditors at least some recovery, any remaining debts will be discharged or eliminated.

What If the Debtor Can't Make His or Her Plan Payments?

Sometimes, something happens that causes a debtor to be unable to honor his obligations under the repayment plan. If--

The event is beyond the debtor's control, like an accident or illness;
The event occurs without any fault of the debtor;
Creditors have already received at least as much as they would have under a Chapter 7 (Liquidation) bankruptcy; and
There is no practical way to modify the repayment plan so that it works

--the debtor may be eligible for a "hardship discharge," in which the debtor's remaining debts will be discharged on the spot.

Timing of Filing for a Hardship Discharge

If the debtor couldn't make plan payments from the beginning, he wouldn't have been eligible for Chapter 13--Chapter 7 would have been the appropriate form of bankruptcy instead. A hardship discharge is NOT something you apply or plan for from the outset; instead, it is reaction to a significant change in circumstances.

Also, creditors must have received at least as much as they would have had the debtor's assets been liquidated under Chapter 7. Since plan payments tend to be fairly small--after all, most bankrupt debtors can only afford to pay so much--it may take some time to accumulated this level of payment.

For both these reasons, a hardship discharge is something to apply for after an unforeseen event has occurred which makes it impossible to meet the Chapter 13 plan. This also means that if nothing changes, the debtor can't apply for a hardship discharge; some additional hardship--beyond the financial distress which led to bankruptcy in the first place--must have befallen the debtor for a hardship discharge to be an option.

How an Attorney Can Help

Not just knowing when to file for a hardship discharge, but also knowing how to make the filing as compelling as possible, is not easy. An attorney can make sure that a debtor who suffers additional hardship, such as an accident or illness, receives the relief to which he or she is entitled.

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