The core of a Chapter 13 bankruptcy case is a three to five year repayment plan. The ability to stretch out past-due balances across 36-60 months can mean the difference between chaos and financial stability, and Chapter 13 allows many people to regroup and rebuild their finances without surrendering property. But, three to five years is a long time. No matter how committed you are to successfully completing your Chapter 13 plan, you can’t always predict the future. Many people considering Chapter 13 are concerned about what will happen if their circumstances change dramatically in the course of a Chapter 13 case. To a degree, the Chapter 13 process is designed to adapt. When a change like an increase or decrease in income occurs, it is often possible to modify the Chapter 13 plan and keep the case moving forward. Occasionally, however, the debtor’s disposable income disappears completely, or becomes so limited that he or she truly can no longer sustain a Chapter 13 repayment plan. When that happens, the debtor may be entitled to a “hardship discharge” that is, many remaining unsecured debts may be discharged despite the fact that the debtor was unable to successfully complete the Chapter 13 repayment plan. However, not everyone who becomes unable to keep up Chapter 13 plan payments qualifies for a hardship discharge, and a hardship discharge won’t resolve all types of debt. A Chapter 13 hardship discharge is a special order from the bankruptcy judge, so you and your attorney must file an application for this discharge. To obtain the hardship discharge the debtor must first show an inability to continue making the scheduled Chapter 13 plan payments. In other words, something has happened to you financially that reduced your income or ability to pay your creditors. The change in finances must be beyond the debtor’s control. For instance, if you voluntarily quit your job to go back to school, you are not eligible for a hardship discharge. The change must be serious and on-going. The debtor must also show how the situation is not likely to change, and modification of the repayment plan is not practical or feasible. Finally, the debtor must demonstrate that if the court approves the hardship discharge, creditors will receive at least as much as they would have received during a Chapter 7 case. Hardship discharges are only granted for the most extreme cases. The Bankruptcy Code also limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts may not get discharged if the case ends early. If you experience a serious financial setback and cannot no longer afford your Chapter 13 payments, discuss the possibility of a hardship discharge with your bankruptcy attorney. In some cases a hardship discharge is available and preferable to modification, conversion, or dismissal. Your attorney can explain these options and help you decide on the best course of action. Qualifying for a Chapter 13 Hardship DischargeUnder Section 1328(b) of the U.S. Bankruptcy Code, a discharge may be granted to a Chapter 13 debtor who has not completed the plan if and only if: So, for example, a debtor who is rendered unable to work by a serious and ongoing medical condition would typically satisfy this requirement. But, if the debtor voluntarily quit his job to start a business that won’t generate significant revenues for a long time (if ever) or was fired for cause, the court would likely determine that the debtor could justly be held accountable for his failure to make plan payments, and so would likely deny a discharge. Each unsecured creditor with an allowed claim has received at least as much as that creditor would have in a Chapter 7 bankruptcy cases. In most cases, Chapter 13 bankruptcy is better for unsecured creditors than Chapter 7. If the debtor has no non-exempt assets, unsecured creditors won’t receive any payment through a Chapter 7 case. But, in a Chapter 13 repayment plan, unsecured creditors may receive a percentage of the funds owed to them through plan payments. In some cases, unsecured creditors receive full payment on the debt through the Chapter 13 case. But when the debtor is unable to continue making payments that can change. This requirement ensures that creditors are not left worse off than if the debtor’s estate had been liquidated. This requirement can present a hurdle for debtors who have not made significant plan payments before the hardship-inducing event occurred and who have non-exempt assets that would have been liquidated for the benefit of creditors in a Chapter 7 case. Modification of the plan is not practicableUnderstandably, the law favours plan modification over total abandonment of the plan. Even if plan payments are reduced, unsecured creditors may still receive some ongoing payments. While some circumstances, such as a permanent disability or a terminal illness, may make it impossible for the debtor to make payments under even a modified plan, modification is preferable when possible. A debtor who meets all three criteria may be granted a discharge without having completed payments under the Chapter 13 plan. But, the discharge won’t necessarily resolve all debts. The Limitations of a Chapter 13 Hardship DischargeFor a debtor, there are two significant differences between receiving a discharge after successful completion of a Chapter 13 plan and receiving a hardship discharge in a Chapter 13 case. Secured DebtThe first and most obvious difference is that while the hardship discharge may relieve the debtor of many remaining unsecured debts, a bankruptcy discharge does not eliminate liens. In a successful Chapter 13 plan, the debtor catches up payments on or entirely pays off secured debt, eliminating or significantly forestalling the risk of foreclosure or repossession. However, when the debtor is unable to complete the plan, some or all of the property serving as collateral for secured debts may be at risk once again. Unsecured DebtNot all unsecured debts are dischargeable in Chapter 7 bankruptcy. In Chapter 13 bankruptcy, some debts–or a portion thereof–that would not be eligible for discharge in Chapter 7 may be eliminated. For example, in a Chapter 13 case the debtor may be able to discharge some or all debt arising from: Debts a Hardship Discharge Won’t EliminateIf the court grants your motion for a hardship discharge, only unsecured non-priority debts get discharged. The following debts typically aren’t wiped out in a hardship discharge: You Must Complete Your Repayment PlanIn Chapter 13 bankruptcy, you agree to pay your disposable income to the bankruptcy trustee appointed to administer your case for three to five years. On successful completion of the plan, any remaining balance on non-priority unsecured debt (credit card balances, personal loans, medical bills, and the like, but not student loans), gets discharged. Your income determines the minimum length of time you must make payments, called the applicable commitment period. Here’s how it works. • in exchange, at the completion of the three- to five-year period, your non-priority, unsecured debt balances would be wiped out. Requesting an Early Discharge Due to HardshipIf you suffer a financial setback, and your plan pays less than 100% of what you owe, the court might end your plan early if your situation doesn’t look like it will improve. Here are the requirements for a hardship discharge: Free Initial Consultation with LawyerIt’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!
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