A few weeks ago, I brought up the question of why a debtor in chapter 13 New York bankruptcy would want to convert his or her case to chapter 7. One reason given was that a “hardship discharge” wasn’t available to the debtor. A hardship discharge is a special discharge available to chapter 13 debtors whose plans have been confirmed but who have begun missing payments. Their circumstances must meet some other conditions, so today’s question is, what are those conditions? According to 11 U.S.C. § 1328(b), there are three, and they give the bankruptcy court quite a bit of leeway in deciding whether a hardship discharge is warranted.
(1) The debtor’s failure to make the required payments occurred for reasons that “the debtor should not justly be held accountable.” The passive voice and the adverb “justly” indicate the breadth of discretion given to the bankruptcy court. Common examples are when the debtor dies, loses a job, or suffers a serious illness.
(2) The creditors holding allowed, unsecured claims can’t receive less money by the repayment plan’s disbursements than they would have had the debtor filed in chapter 7. What this means is that the hardship discharge can’t be a windfall to the debtor. The most frequent example is if the debtor owns a house that would’ve been liquidated in chapter 7 but not in chapter 13. This is usually a situation when converting the case to chapter 7 works better than trying to obtain a hardship discharge.
(3) For the last requirement, a modification to the plan must not be “practicable.” In point of fact, this should probably be the first requirement for a hardship discharge. Many plans can’t be modified anyway, so it’s not too hard to meet this requirement.
So, to answer the question set out by this post, debtors should consider hardship discharges when they can’t modify the plans, when an immediate discharge won’t disadvantage creditors if the case had been filed in chapter 7, and when they have some kind of compelling reason to show they deserve it.
Now, how does a debtor go about obtaining a hardship discharge? It requires filing a motion with the bankruptcy court and arguing it in front of the trustee and other creditors. Because it’s so important to a bankruptcy case, it should not be attempted without a lawyer.
It should be noted that a hardship discharge is not unlimited. The standard chapter 13 discharge (appearing in § 1328(a)) is broader than the kind chapter 7 offers because it includes some debts listed in § 523(a) and some tax debts not discharged in § 1328(b). However, many debts like domestic support obligations, student loans, some ineligible tax debts, and others are still not discharged. The hardship discharge applies only to unsecured debts.
If your chapter 13 repayment plan is in trouble and you think a hardship discharge is possible, contact an experienced New York bankruptcy lawyer to discuss the situation and handle the motion.
For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Chapter 13 Bankruptcy Lawyer Brooklyn NY Bruce Weiner for a free initial consultation.
