When you can’t make the payments on a confirmed Chapter 13 plan, there are hard choices to make. There are several alternatives that we’ll explore over the next week. My usual favorite option, however, is a hardship discharge under §1328(b).
A bankruptcy discharge under §1328(b) wipes out all the debt that would have been dischargeable had the case been filed under Chapter 7 from the outset. Unpaid priority claims like taxes or back family support survive a hardship discharge, but the rest of the debt is discharged just as if the plan had been completed.
To qualify for a hardship discharge, the best interests of creditors test has to have been satisfied: creditors must have gotten at least what they would have had the case been a Chapter 7. Further, the reason the debtor can’t complete the plan has to be one outside of the debtor’s control. Death, ill health, and job loss all seem to fall in that category.
Why do I like a hardship discharge rather than converting a cratered Chapter 13 to Chapter 7? When the discharge is entered under Chapter 13, the debtor is eligible to file another Chapter 13 immediately. There is no wait imposed as there is between a Chapter 7 discharge and a discharge in a subsequent case under any chapter. Lesser advantages include the fact there is no need for a new 341 meeting or amended schedules, as there would be if the case were converted to Chapter 7.
Among my clients recently, the distressed Chapter 13′s have often included debt that is not dischargeable in Chapter 7. While the hardship discharge won’t discharge priority taxes, for instance, by electing a hardship discharge, my clients are eligible to file another Chapter 13 when they are again healthy or employed, and can benefit from the automatic stay in a subsequent case to finish paying the debts that often drove the Chapter 13 in the first place.