Bankruptcy and the Hardship Discharge.

07 Feb Bankruptcy and the Hardship Discharge.

When people are in a Chapter 13 bankruptcy and hit a snag in their case, often they request a hardship discharge. The name alone should indicate that this type of discharge is not given upon a mere request. There are specific requirements that must be met before you can even be considered for this type of discharge. “I do not want to be in the bankruptcy case anymore” it not a good enough reason.

As attorneys we look to the bankruptcy code for guidance when seeking a discharge. A hardship discharge can be found under 11 U.S.C. 1328 (b) for guidance as to who qualifies. The attorney must first draft a motion requesting the hardship discharge and outlining specifically as to why you would qualify. The first step in the analysis is whether or not your Plan is confirmed (approved by the court). If the answer is yes the plan is confirmed and you qualify for a regular discharge you can move on to the next step.

The attorney must determine whether or not you can continue to make the ongoing Plan payments. The code describes this as a modification. In layman’s terms it is what can you do to help your self?

Can you make the ongoing Plan payments? If you cannot, why not? If you surrendered something could you make the ongoing Plan payments? If you reduced your expenses could you make the payments? If you obtained another job could you make the payments? These all may be considered when analyzing this step of a hardship discharge. We must show that your failure to complete the Plan payments are due to circumstances for which you should not be held accountable for. Once we complete this analysis we move on to the next step.

In filing a Chapter 13 you always have to consider what the trustee in the case would have been able to receive in the case if it were filed as a Chapter 7. Let me try an illustrate this through an example. You file a Chapter 13 and own a Hummer worth $20,000 at the time of filing the case. The amount of money that you owe to the lender on the date of filing is $10,000. This is known as lien against the vehicle and in this case the lien leaves $10,000 in equity in the Hummer if you sold the vehicle. This $10,000 in equity is an asset that belongs to the Chapter 13 at the time of filing. If we use the State of Missouri exemptions I can protect $3,000 of that $10,000 equity. This exemption will reduce the equity asset to $7,000. $20,000 (value of Hummer) – $10,000 (debt owed to the lender to purchase the vehicle) – $3,000 (the amount of the exemption I am allowed to use to protect an asset) = $7,000 cash that may be used to pay down your debt if the Hummer was sold for value.

Therefore, in a Chapter 13 you must pay into your case $7,000 over the life of the case to be distributed to your unsecured creditors. In a Chapter 7 you would either have to pay the Chapter 7 trustee the amount in equity ($7,000) or the trustee would take the Hummer and sell it. Once the proceeds are received the trustee would pay off the lender first, pay you $3,000 because that is the amount protected and then take the remaining funds to pay towards your unsecured creditors.

So in analyzing the hardship discharge qualification if the $7,000 had not already been paid into the court you would not qualify for a hardship discharge. But what if you did not have any non-protected assets that you were paying to keep in a Chapter 13? If under the Chapter 7 analysis the trustee would have received nothing then you would not have to pay anything into the Chapter 13 towards the unsecured creditors to receive a hardship discharge. Bottom line if the Chapter 7 trustee would have received funds if this case was a Chapter 7, you will have had to pay in at least that amount to the unsecured creditors in the Chapter 13 case to be considered for a hardship discharge.

So if:

  1. Your Plan is confirmed; and
  2. You are eligible for a regular Chapter 13 discharge; and
  3. Your current circumstances prevent you from making your ongoing Chapter 13 payments; and
  4. The circumstances creating this inability to pay is out of your control; and
  5. You have paid into the Chapter 13 towards the unsecured creditors the amount that would have been paid if you filed a Chapter 7; and
  6. There are no changes you can make to allow you to make the ongoing Plan payment;
  7. You just might qualify for a Chapter 13 Hardship Discharge.

Remember that knowledge is power. The more knowledge you have about the bankruptcy code the more power you will have in obtaining a discharge in your bankruptcy case.

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Former Bankruptcy Attorney to the Kansas City UAW: Ford and GM workers, now assisting the general public in Missouri and Kansas with regaining financial control using the Bankruptcy Code. 816-472-HELP (4357).

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