When you file for Chapter 13 bankruptcy, you don’t usually receive a discharge until you complete your repayment plan. But a Chapter 13 plan typically lasts three to five years, so it’s not uncommon to experience a significant change in financial circumstances. If you can’t continue to make your payments, you can ask the court for a hardship discharge. Read on to learn more.
A hardship discharge is a discharge the court grants you before you complete all of the required payments under your Chapter 13 repayment plan. To receive a hardship discharge, you must file a motion with the bankruptcy court and satisfy all three of the following conditions:
To qualify for a hardship discharge, the change in your circumstances must not be your fault. Also, you must typically show that a serious and permanent reason or condition prevents you from completing your plan, such as a life-changing medical condition that arose after filing your case. Temporarily losing your job or experiencing a decrease in income is not sufficient. In that situation, you might want to consider converting your case to Chapter 7.
Before you can receive a hardship discharge, you must show the court that your Chapter 13 plan has already paid your unsecured creditors—those debts that aren’t secured by collateral—as much money as they would have received in Chapter 7 bankruptcy.
The amount of money your unsecured creditors would have received in Chapter 7 bankruptcy depends on the amount of nonexempt property you own. Nonexempt property gets sold in Chapter 7. By contrast, you pay your creditors for nonexempt property as part of your Chapter 13 repayment plan—which is why you get to keep it.
If you’re paying for a significant amount of nonexempt property in your plan and your Chapter 13 plan was recently confirmed (approved), you might not have paid your unsecured creditors enough to qualify for a hardship discharge.
If your circumstances change after filing for Chapter 13 bankruptcy, bankruptcy laws allow you to modify your plan accordingly. For example, if your income goes down during bankruptcy, you might be able to modify your plan to reduce your payment amount. A judge can reduce the amount you’re paying toward nonpriority, unsecured debt, such as credit card balances, medical bills, and personal loans.
Ultimately, you must show the court that modifying your plan is not feasible or practical—that your circumstances are so dire that even a modification would not help you complete your plan.
A Chapter 13 hardship discharge is similar to a Chapter 7 bankruptcy discharge, and some debts survive Chapter 7 because it wipes out only dischargeable nonpriority unsecured debts. A Chapter 13 hardship discharge won’t eliminate the following types of debts:
Also, many people file for Chapter 13 to help keep a home, and you’ll lose that benefit if you receive a Chapter 13 hardship. Once you’re no longer making Chapter 13 repayment plan payments, you won’t be able to catch up on missed mortgage or car loan payments or other past-due secured debt (obligations secured by collateral) and you could lose your house or vehicle. Consider contacting the lender about available options.
Also, because a Chapter 13 hardship discharge is so similar to a Chapter 7 discharge, you might find it helpful to learn about the differences between Chapter 7 and 13 bankruptcy.
It’s not uncommon for a debtor to have an income change during a Chapter 13 case. If you can’t pay your current payment, you’ll want to see if it can be adjusted before you drop out of your plan altogether. Your bankruptcy lawyer will review your matter and advise you of the best course of action.