Despite their many benefits, Chapter 13 cases can sometimes be difficult to complete. Often requiring payments to a Trustee over five years, they can be derailed by unforeseen expenses, job loss, illness or other difficulties. If you can’t make the payments, is all lost? Not necessarily. A little-used provision of the Bankruptcy Code, 1328(b), may offer a solution. Called a “Hardship Discharge,” it lets you stop your payments early and still receive a Chapter 13 discharge anyway. There are some requirements.
First, your inability to complete your payments must be due to circumstances for “which the debtor should not justly be held accountable.” Some examples in which I have obtained hardship discharges for clients are where payments couldn’t be made because of the death of the debtor or a family member, job loss, illness, and separation.
Second, you are unable to modify the Plan to fix the problem. If the difficulty is just temporary and extending a Plan term or lowering payments would fix it, you can’t get a hardship discharge. Note that in many cases, the Plan payments are already as low as they can go consistent with the requirements of your situation and the law, and most Plans are at the maximum 60-month length. In such cases, the Plan can’t be modified to fix things, and this requirement is met.
Third, your general unsecured creditors had to receive at least as much in Chapter 13 distributions as they would have received in a Chapter 7 liquidation. If you don’t own a house, or the house has no equity, you’re probably OK. If there’s a lot of equity, however, there could be a problem meeting this requirement.
I don’t recommend this as a do-it-yourself project, since there’s a hearing required before the Court before a hardship discharge can be granted, so check with your attorney. In some cases, a hardship discharge can be a good way out of a bad situation. And if you can’t qualify for a Hardship Discharge, most people can convert their case to a Chapter 7, or dismiss their Chapter 13 and file a new case immediately.
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Last modified: November 28, 2012