Chapter 13 Hardship Discharge

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Chapter 13 Hardship Discharges in Bankruptcy

Often a debtor is in the process of losing a job or becoming disabled.   He may need the protection and  benefits of a Chapter 13.  But completing a Chapter 13 plan may be questionable because a disability, death or divorce is probably or certain. The debtor may need to start their Chapter 13.  Due to no fault of her own she has health problems and needs to include medical debts later.  She can file a Chapter 13 and eventually obtain the early hardship discharge or convert to a Chapter 7.

This allows the debtor to file now and immediately get the protection they need but delay discharge until it is needed.  Often this discharge will allow you to get all of the medical or other debts in for complete relief.

Obtaining the Chapter 13 Hardship Discharge

Medical debt incurred after filing a Chapter 13 is simply added to the petition and those medical debts may be discharged later. The Chapter 13 debtor can ask the court for an early hardship discharge under 11 USC §1328(B) when:

  1. The debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control through no fault of the debtor;
  2. Creditors have received at least as much as they would have received in a Chapter 7 liquidation case; and
  3. Modification of the plan is not possible.

Qualifying for a Chapter 13 Hardship Discharge two good examples.

The perfect example of this is the unemployable, disabled widow.  During the plan she had an employed husband that made the plan payments. Due to no fault of her own he died.  Now she can’t make plan payments and she deserves an early discharge.   They made payments to the creditors for 3-4 years in good faith.  The creditors got more than a Chapter 7 would have paid.  And it is impossible to just modify the plan and make the Chapter 13 work.

However this requires that you do this in good faith.  In one case the widow murdered her husband and then wanted the discharge.  That didn’t work.  The death was not “due to circumstances beyond her control.

Early and Hardship discharges allow a debtor a huge benefit over converting to a Chapter 7. To get a hardship discharge a debtor has to supply proof they qualify for a Chapter 13 hardship discharge under 11 U.S.C. § 1328(b). Injury or illness is often the reason for a hardship discharge. If you want a long version of what needs to go into the motion to approve a hardship discharge look at the Bandilli case.  In re Bandilli, 231 BR 836, (BAP 1st Circuit 1999).

The six Bandilli criteria are:

What the court seems to be looking for is did you make your best efforts to complete the plan and some event came along like Hurricane Maria to defeat the Chapter 13 plan.  If so you qualify.  It is ok if you can see the Hurricane coming and file the Chapter 13 knowing you may have to ask for the hardship discharge later.  It is not ok to cause the Hurricane and then complain about it.  Here are the elements of the test:

  1. Whether the Chapter 13 debtor has presented substantial evidence that he or she had the ability and intention to perform under the Chapter 13 plan at the time of confirmation.
  2. If The Chapter 13 debtor materially performed under the plan from the date of confirmation until the date of the intervening event or events.
  3. If the intervening event or events were reasonably foreseeable at the time of confirmation of the Chapter 13 plan.
  4. Whether the intervening event or events are expected to continue in the reasonably foreseeable future.
  5. If the Chapter 13 debtor had control, direct or indirect, of the intervening event or events.
  6. Whether the intervening event or events constituted a sufficient and proximate cause for the failure to make the required payments.