Poet Robert Burns warned hundreds of years ago that the best laid plans can go awry, and Chapter 13 bankruptcy is just that -- a plan. You enter into a court-approved schedule to pay your debts down over a 3 to 5 year period. At the end of this time, if any portion of your unsecured debts remain unpaid, the balances are discharged and you no longer have to pay them. But a lot can go wrong during that time, so if circumstances change, you might be eligible for a hardship discharge before your payment plan is completed.
Requirements for a Hardship Discharge
You must meet a three-pronged test to qualify for a hardship discharge. First, something unforeseen must have happened to prevent you from making your scheduled Chapter 13 payments as planned. The change can’t be anything you had control over. If you lose your job, you may be eligible. If you quit your job, you probably won’t be
The second test compares what you’ve paid to your creditors through your payment plan so far against what they would have received if you had filed for Chapter 7 instead. Chapter 7 is the form of bankruptcy where the trustee sells your non-exempt property to raise money to pay off your debts. Bankruptcy law allows for exemptions for certain assets so you don’t lose everything -- the trustee can’t liquidate exempt property. Qualifying for a hardship discharge in Chapter 13 may not be possible if you own a lot of non-exempt assets that would have raised more money for your creditors in a Chapter 7 bankruptcy than you’ve paid through your Chapter 13 plan.
The third test involves establishing that you can’t modify your Chapter 13 payment schedule, reducing the payments to make them more manageable. You must show it’s unlikely that you’d be able to make even smaller payments given your change of circumstances.
Filing the Motion
Your next step is to file a motion with the bankruptcy court as part of your Chapter 13 proceeding, asking the judge to grant you a hardship discharge. Your creditors will receive notice of your request. Some of them are permitted to object, For example, a creditor can object if you committed some type of fraudulent act to incur a debt. This might be the case if you ran up a credit card balance knowing you were going to file for bankruptcy and never planned to pay the bill.
Your Burden of Proof
The judge most likely will require you to appear in bankruptcy court to plead your case for a hardship discharge. You have the burden of proof to establish that the reason you can’t make your Chapter 13 payments isn’t a temporary circumstance. You might have lost your job, but if the court feels that you can find another within a reasonable period of time, you may not be granted a hardship discharge. If you can’t work because you’ve been injured or fallen ill, you must prove that the condition is permanent or at least it’s expected to prevent you from working for an extended period of time. You may need to provide medical records to bolster your case.
Effect on Your Debts
A hardship discharge isn’t as encompassing as the discharge you’d receive if you had been able to complete your Chapter 13 plan. It only erases unsecured debts, such as credit cards. If you were paying off mortgage or car payment arrears through your Chapter 13 plan, these debts aren’t discharged. You’ll still owe student loans, taxes and family support obligations such as alimony.