What Is A Hardship Discharge In Chapter 13 Bankruptcy?
To put it simply, chapter 13 bankruptcy is a repayment plan that allows you to get out of debt by paying your creditors as much as you can afford to over a period of time.
Chapter 13 bankruptcy contemplates the debtor completing her plan by making all of the payments before receiving a discharge.
However, Congress provided an escape hatch where circumstances beyond a debtor’s control prevent them from completing their plan.
This escape hatch is known as the chapter 13 hardship discharge which provides in relevant part that:
“[A]t any time after the confirmation of the plan and after notice and a hearing, the court may grant a discharge to a debtor that has not completed payments under the plan only if—
(1) the debtor’s failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable;
(2) the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title on such date; and
(3) modification of the plan under section 1329 of this title is not practicable.
The Circumstances Have To Be Beyond The Debtor’s Control
In order to even qualify for a hardship discharge the debtor’s circumstances must be beyond her control.
I recently had a case where the debtor’s kidney’s began failing two years into her 5 year plan. She went from being an energetic healthcare professional to a patient, seemingly overnight. Her treatment required that she undergo dialysis treatment three times a week for four hours per session. In time she lost her job, her disability payments ran out, and she could no longer afford her plan payments.
If you ask the court for a hardship discharge the first question the judge is going to ask is: did the debtor create the circumstances giving rise to the hardship? Or are they circumstances beyond her control for which she should not justly be held accountable?
Unsecured Creditors Must Receive At Least As Much As They Would Have Had The Debtor Filed Chapter 7 Bankruptcy Instead Of Chapter 13
This is the same “liquidation test” that is used by the court to determine whether a debtor’s chapter 13 plan should be confirmed.
The liquidation test is a tool to measure the fairness of chapter 13 plans in relation to unsecured creditors. If unsecured creditors would receive greater value in chapter 7 than than they would under the debtor’s proposed chapter 13 plan, then confirmation of the plan will be denied. Unsecured creditors have to receive in chapter 13 at least as much as they would if the debtor filed chapter 7.
The same is true in the context of a request for hardship discharge. Because much of bankruptcy law is geared toward creditor fairness the court doesn’t want debtors gaining an advantage over their creditors using the hardship discharge.
Suppose a debtor files chapter 13 and proposes a plan that pays 20 cents on the dollar to her unsecured creditors. The plan pays 20 percent because under the liquidation test if debtor filed chapter 7 her unsecured would realize as much upon the sale of her non-exempt assets. Under the liquidation test the debtor will be unable to receive a hardship discharge unless she can demonstrate to the court that her unsecured creditors have received 20 cents on the dollar under her plan.
The debtor may be able to do so, but close attention must be paid to the liquidation test both before the case is ever filed and in seeking hardship discharge relief.
Hardship Discharge In Chapter 13 Has To Be The Last Available Option
If the debtor could modify her plan to cure the problem, she will be denied a hardship discharge.
This makes practical sense. Congress and the courts want debtors to complete their chapter 13 plans if it is practicable for them to do so. After all, the whole point of chapter 13 is to pay creditors something. If the debtor can fix the problem or circumstance she finds herself in by asking the court to modify her plan, then she will be unable to meet the third requirement for a hardship discharge in chapter 13 bankruptcy and her request will be denied.
What Debts Does A Hardship Discharge In Chapter 13 Bankruptcy Get Rid Of?
The hardship discharge in chapter 13 bankruptcy is not as broad as where the debtor fully complies with her plan and completes all of her payments.
The bankruptcy code at 11 U.S.C. 1328(c) sets the limitation and provides that:
“A discharge granted under subsection (b) of this section discharges the debtor from all unsecured debts provided for by the plan or disallowed under section 502 of this title, except any debt—
(1) provided for under section 1322(b)(5) of this title; or
(2) of a kind specified in section 523(a) of this title.”
When the debtor in chapter 13 bankruptcy completes all of her payments she gets what is sometimes referred to as a “super discharge.” It is called a “super discharge” because it discharges many of the debts excepted from discharge under 11 U.S.C. 523(a).
The hardship discharge isn’t as broad. If the debtor has any debts of the kind listed in section 523(a), those debts will remain her personal liability after a hardship discharge.
The Law Office of David P. Farrell represents people in chapter 13 bankruptcy throughout Southern California. Contact us today for a free, no-obligation consultation and find out today if chapter 13 bankruptcy is right for you.