When the Unexpected Prevents You from Completing your Chapter 13 Payment Plan
The Hardship Discharge: An Early Exit from Chapter 13 Bankruptcy (But Not the Way You'd Probably Like!)
A Chapter 13 bankruptcy is a "payment plan" bankruptcy requiring to pay what you can afford to pay (after household expenses are considered) to your creditors within a specific period of time. Whatever you don't pay to your creditors in that period of time is discharged—meaning you never have to pay under force of Federal law—just as your (dischargeable) debt is in a Chapter 7 bankruptcy. A Chapter 13 bankruptcy usually lasts no fewer than 36 months and no more than 60 months (from the date of "confirmation," or approval by the court, of your Chapter 13 plan here in the Eastern District of Michigan). Making the monthly payments required by a Chapter 13 bankruptcy payment plan requires, naturally, that you have ongoing income and/or the ability to earn income throughout the life of the plan. What happens when some tragedy strikes to prevent you from earning that income? The "hardship discharge" is a possibility.
What Is the Hardship Discharge?
The hardship discharge is an "early release" from the Chapter 13—at least insofar as the remaining payment term of the Chapter 13 plan goes. It is a somewhat more limited discharge, however, than you would have gotten if you'd actually completed the payment plan, and, naturally, there are also some restrictions. The Bankruptcy Code (the Federal law governing the bankruptcy process) allows a "hardship discharge" if:
- Your plan has already been confirmed (approved) by the bankruptcy court;
- Your failure to complete the plan is due to circumstances for which you are not responsible;
- The funds distributed to your creditors thus far in your plan meets or exceeds what they would have received if you had filed a Chapter 7 bankruptcy and had some non-exempt property seized and liquidated (which does not happen in a Chapter 13);
- and simple modification of the terms of your plan is not practicable.
Certain debts that are not dischargeable in Chapter 7 bankruptcy but which are under Chapter 13 may not be fully discharged via hardship. There also remains the obligation to complete the post-filing "debtor education" course in order to obtain a hardship of any sort (though this requirement may sometimes be waived by separate motion filed by your bankruptcy attorney).
What Sorts of Hardship Qualify for the Hardship Discharge?
This will always be a necessarily fact-based question, and it is one that may need to be resolved via evidentiary or other hearings before your bankruptcy judge. What Judge X finds to be a qualifying hardship may not be what Judge Y finds qualifying, and there are many examples of specific hardships for specific Chapter 13 debtors throughout the bankruptcy court system's body of case-law. What is important to know is that it is not going to be a simple inability to pay. What caused the inability to pay? An auto accident resulting in total paralysis or a job-loss resulting from telling your boss what you really think of him? Judges will universally apply a high bar to this question. It is one of the reasons that it is highly inadvisable to attempt to file a Chapter 13 bankruptcy without retaining an experienced bankruptcy attorney to represent you. If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.
If you enjoyed reading "What Is the Hardship Discharge in Chapter 13 Bankruptcy?," please browse our other articles on our main Michigan Bankruptcy Blog.