A Chapter 13 bankruptcy lasts three to five years. During that time all of the debtor’s disposable income is used to repay creditors. At the end of the case, the remaining debts are discharged and the debtor receives a financial “fresh start .”
But what if circumstances change? For some, the answer is a Chapter 13 hardship discharge. A hardship discharge is granted by the bankruptcy court to a debtor unable to complete her Chapter 13 repayment plan, and will end the case before the plan termination date.
A Chapter 13 hardship discharge is a special order from the bankruptcy judge, so you and your attorney must file an application for this discharge. To obtain the hardship discharge the debtor must first show an inability to continue making the scheduled Chapter 13 plan payments. In other words, something has happened to you financially that reduced your income or ability to pay your creditors.
The change in finances must be beyond the debtor’s control. For instance, if you voluntarily quit your job to go back to school, you are not eligible for a hardship discharge. The change must be serious and on-going. The debtor must also show how the situation is not likely to change, and modification of the repayment plan is not practical or feasible.
Finally, the debtor must demonstrate that if the court approves the hardship discharge, creditors will receive at least as much as they would have received during a Chapter 7 case. Hardship discharges are only granted for the most extreme cases. The Bankruptcy Code also limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts may not get discharged if the case ends early.
If you experience a serious financial setback and cannot no longer afford your Chapter 13 payments, discuss the possibility of a hardship discharge with your bankruptcy attorney. In some cases a hardship discharge is available and preferable to modification, conversion, or dismissal. Your attorney can explain these options and help you decide on the best course of action.