Chapter 13 Bankruptcy: Hardship Discharge

When you file for Chapter 13 bankruptcy, you don’t usually receive a discharge until you complete your repayment plan. However, 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.

What Is a Chapter 13 Hardship Discharge?

A hardship discharge is a discharge the court grants 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 prove that you meet the three following conditions:

• You failed to complete your payments because of circumstances beyond your control.
• Your unsecured creditors already received as much money as they would have received under Chapter 7 bankruptcy.
• Modification of your repayment plan is not feasible.

Do the Circumstances Justify a Hardship Discharge?

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 consider converting your case to Chapter 7.

Have Your Unsecured Creditors Been Paid?

Before receiving a hardship discharge, you must show the court that your Chapter 13 plan has already paid your unsecured creditors as much money as they would have received in Chapter 7 bankruptcy. Unsecured debts, like credit card balances and medical bills, aren’t secured by collateral.

The amount of money your unsecured creditors would have received in Chapter 7 bankruptcy depends on the amount of nonexempt property you own. Nonexempt assets weren’t covered by a bankruptcy exemption when you filed. In Chapter 7, nonexempt property gets sold in Chapter 7. By contrast, you pay your creditors to keep nonexempt property in Chapter 13.

You'll meet this element easily if all your property was exempt when you filed. However, that won’t be the case if you’re paying for a significant amount of nonexempt property in your plan and your Chapter 13 plan was recently “confirmed” or approved. You probably won’t have paid your unsecured creditors enough to qualify for a hardship discharge.

You must meet this criterion because creditors are entitled to receive an amount equal to your nonexempt property in exchange for a discharge. All filers must comply with this requirement, even when suffering a hardship.

Is a Chapter 13 Plan Modification Not Feasible?

If your circumstances change after filing for Chapter 13 bankruptcy, bankruptcy laws allow you to modify your plan accordingly. For example, suppose your income goes down during bankruptcy. In that case, you might be able to modify your plan to reduce your payment amount.

A judge can only reduce the amount you’re paying toward nonpriority, unsecured debt, such as credit card balances, medical bills, and personal loans—not other payment categories. If you aren’t paying much toward that debt category, which wouldn’t be unusual, the amount the court could reduce your payment by might not be adequate.

If it isn’t, you’ll meet the requirement by showing the court that the modification amount possible wouldn’t be sufficient for you to complete your plan. Modifying your plan isn’t feasible or practical.

What Debts Will a Hardship Discharge Eliminate?

A Chapter 13 hardship discharge isn’t much different than a Chapter 7 bankruptcy discharge. Some debts survive Chapter 7 because it wipes out only dischargeable nonpriority unsecured debts. Similarly, a Chapter 13 hardship discharge won’t eliminate the following types of debts:

• priority debt
• student loans, and
• other debts that are nondischargeable in Chapter 7 bankruptcy.

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 very similar to a Chapter 7 discharge, you might find it helpful to learn about the differences between Chapter 7 and 13 bankruptcy.

Consult With a Bankruptcy Lawyer

It’s common 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 about how to proceed.