What happens to bankruptcy debtors who are in a Chapter 13 case, but hit a bump along the road and find that they are no longer able to make their monthly payments to the trustee? In cases like this, a hardship discharge may be available.
There are three essential requirements, all found in bankruptcy code
section 1328 (b). First, the debtor’s failure to complete their plan must be “due to circumstances for which the debtor should not justly be held accountable.” Either debtor or spouse getting laid off from a job would be the classic example. Quitting or getting fired for cause, not so much. Judges have great latitude deciding exactly what constitutes unusual circumstances.
Second, creditors must have already received more through plan payments than they would have gotten in a hypothetical Chapter 7 filing. For most debtors this will not be an obstacle, but if the case was filed in Chapter 13 because there were substantial non-exempt assets, it could preclude the hardship route.
Third, the “bump in the road” needs to be substantial enough that it can’t be fixed by submitting a modified plan. If extending the term of the plan (to a maximum of 60 months) would lower payments, the court might insist you take that route instead.
Debtors and bankruptcy lawyers also need to be aware of the limitations of the hardship discharge. By law it does not cover secured or priority debts, so that debtors with mortgage or tax problems need to carefully consider whether the benefit of the discharge is worth the effort of applying to the court for one.
By Doug Beaton