Hardship and Early Chapter 13 Bankruptcy Discharge

If a Debtor has made the majority of his plan payments in the Chapter 13 plan but can not continue to make payments due to no fault of his own, he may ask for an early or hardship discharge.  The words Hardship Discharge just like the words inside the plan are not in the code.  However, all discharges come from 11 USC 1328(b).  If you read this section, it looks like you could ask for discharge the day after you file.

Generally, our court will not allow an Early or Hardship discharge until three years of payments.  The Debtor cannot cause his problems and then complain about how he cannot complete the plan.  And the debtor must have done his best efforts to complete the plan.  Becoming disabled is the classic cause of a Hardship-Early discharge.  Becoming unemployed the month after you filed is not a basis for this type of discharge.  The closer the case is to the end the easier an early discharge becomes.

If the debtor has become disabled, he will often be allowed an early discharge.  However, if he simply quit his job, he is not allowed to complain about it. Modifying a plan or suspending plan payments is the proper way to cure a short-term job loss.  If you bought a car without court approval and then can’t afford the Chapter 13, you won’t get the early discharge.

The liquidation test in early discharge cases. 

To get the discharge in Chapter 13, every case must past a liquidation test.   What this means is the Chapter 13 must repay as much as if it had been filed in Chapter 7.   If the Debtor would have lost a diamond ring worth 5,000 in Chapter 7 because he did not have enough exemptions, then his Chapter 13 must repay at least 5000 dollars because the case would have repaid 5,000 as a Chapter 7.   This liquidation test is a calculation that has to be in the motion as an exhibit.

If the Debtor simply needs a short period without payments or needs his payments lowered the debtor should instead modify the plan or ask for a temporary order allowing him or her to suspend payments for a couple of months.  A common example is short-term maternity leave.

Chapter 13 Plan Modifications

A debtors payments can be increased or decreased.   All of the debtor’s disposable income is required to be paid in a Chapter 13 plan.  Hiding income or the failure to turn over a tax refund may prevent a discharge.  But if the debtor’s income is lowered the plan payments can be lowered.  A Chapter 13 can also be converted to a Chapter 7.  The plan can also be increased if the debtor obtains a higher paying job.  The plan is very flexible and can include increasing or decreasing payments over time in a step plan.

A debtor normally can’t pay off the plan early because rules require the debtor to commit all of his disposable income.   However, no debtor is required to pay more than 100%.  If you earn less than the average income, you may have a 36-month plan.   If you earn over the average wage, you must have a 60 month plan.  It is far easier to file a new budget and ask the court to reduce or suspend plan payments rather than obtain an early discharge.  And a Debtor can always increase the plan from 36 months to 60 months.

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