When Can I Receive a Hardship Discharge in a Chapter 13 Bankruptcy?

 Posted on September 03, 2021 in Chapter 13

Debtors have multiple options for addressing debts through bankruptcy. For those who have secured debts such as a home mortgage or other loans where they wish to maintain ownership of the collateral, or in cases where a family’s income exceeds a certain threshold, Chapter 13 bankruptcy may be the best option. In these cases, the debtor will propose a repayment plan in which they will put their disposable income toward paying off as much of their debts as possible over a period of three or five years, and after completing all payments in the plan, they will receive a discharge of the unsecured debts that are remaining. However, debtors may be concerned about what will happen if they encounter financial difficulties that affect their ability to make these payments. In these situations, a debtor may qualify for a hardship discharge.

Eligibility for a Hardship Discharge

Typically, if a debtor does not make all of the payments in a Chapter 13 repayment plan, their bankruptcy case may be dismissed, and they will continue to owe debts to creditors. However, if a debtor becomes unable to continue making payments in their plan, they may ask the court to approve a hardship discharge, which will allow the remaining debts in the plan to be eliminated. To qualify for a hardship discharge, a debtor must meet the following requirements:

• The debtor must be unable to complete their repayment plan through no fault of their own and due to circumstances that are out of their control. For example, a serious illness may have caused a person to be unable to work full-time, leading to a reduction in income and an inability to make payments. A debtor will usually need to show that the conditions that have affected their ability to complete the repayment plan are expected to be long-term or permanent rather than a short-term or temporary setback.

• During their repayment plan, the debtor must have made payments to creditors of unsecured debts that are equal to or greater than what those creditors would have received if the debtor had filed for a Chapter 7 bankruptcy. The amount that creditors would receive in a Chapter 7 case will depend on the value of the debtor’s nonexempt property. If the debtor has already made a significant number of payments, creditors may have received payment for some of the debts owed, and the debtor may qualify to have the rest of the debts discharged.

• It would not be practical to modify the debtor’s Chapter 13 repayment plan. In many cases, a bankruptcy court will prefer to make adjustments to a repayment plan based on the debtor’s disposable income. If the debtor’s changed circumstances have reduced their income to the point where they would be unable to make payments in a modified plan, they may be able to receive a discharge.

If a hardship discharge is granted, a debtor should be sure to understand what types of debts can be discharged. Priority debts that could not usually be discharged through bankruptcy, such as tax debts, student loans, and child support obligations, will still need to be paid. The debtor will also be required to continue making payments on secured debts if they wish to keep the property used as collateral. However, unsecured debts, such as credit cards or medical bills, can be discharged, and the debtor will no longer be required to make payments to these creditors.

Contact Our New Braunfels Chapter 13 Bankruptcy Attorney

At the Law Offices of Chance M. McGhee, we can help you address issues that may affect your ability to complete a Chapter 13 repayment plan, including asking for modifications or requesting a hardship discharge. To get legal help with these issues, contact our San Antonio bankruptcy lawyer at 210-342-3400 and arrange a free consultation.

Source:

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-13-bankruptcy-basics