What Is a Hardship Discharge?

18 Jun What Is a Hardship Discharge?

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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Brett Weiss, a senior partner at The Weiss Law Group, LLC, represents people and businesses in all phases of bankruptcy. He has experience in complex individual Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases, and in Chapter 11 small business restructuring and reorganization. Mr. Weiss lectures nationally on bankruptcy issues. He has testified before the Federal Bankruptcy Rules Committee, the Consumer Financial Protection Bureau, and has twice testified before Congress on bankruptcy and credit issues. Brett Weiss is the co-author of Chapter 11 for Individual Debtors, and has written Not Dead Yet: Bankruptcy After BAPCPA, for the Maryland Bar Journal, as well as hundreds of blogs for the Bankruptcy Law Network. With his colleague, Daniel Press, he recorded a 13-hour basic bankruptcy training series, and leads intensive three-day Chapter 11 training boot camps. Mr. Weiss has received international media attention in connection with his work. He was interviewed by Barbara Walters on The View, has appeared on the Today Show, Good Morning America, ABC News with Peter Jennings, the Montel Williams Show, National Public Radio, AARP-TV, the BBC World Service, German state television, and numerous local radio and television programs, and been quoted in Money magazine, The Washington Post and The Baltimore Sun, among others. Brett Weiss is the previous Maryland State Chair for the National Association of Consumer Bankruptcy Attorneys, a founding member of the Bankruptcy Law Network, on the board of the Maryland State Bar Consumer Bankruptcy Council, and a member of the American Bankruptcy Institute and the Bankruptcy Bar Association of Maryland. He has received the Distinguished Service Award from the National Association of Consumer Bankruptcy Attorneys for his work on behalf of consumers across the country. Mr. Weiss is admitted to practice before Maryland and District of Columbia federal and state courts, the United States Courts of Appeals for the DC, Fourth and Eighth Circuits, the United States Tax Court, and the Supreme Court of the United States, and has been practicing law since 1983.

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