One bankruptcy option many people use is Chapter 13, which reorganizes your debts with a repayment plan to get finances under control. Repayment plans span three to five years, and your bankruptcy fresh start is at risk if you miss payments. However, the law recognizes bad fortune is a reality, and there is a limited solution called a hardship discharge.
Whether you're thinking about filing a Chapter 13 case, or you have a Chapter 13 repayment plan and you're worried that you won't be able to make your payments, learn about the hardship discharge, and how it's used.
Defining Hardship Discharge
A discharge in a bankruptcy case is when the court releases the filer from further duty to pay debts. For example, in a Chapter 13 case, once a repayment plan is complete, generally, the court discharges remaining debts not covered by the plan.
A hardship discharge is included in federal bankruptcy laws to help those who can't complete their payment plans due to factors beyond their control. If you caused your inability to pay, the court won't use a hardship discharge. The hardship discharges is intended to help only those people who truly deserve compassion for their troubles.
Examples of Hardship Situations
Every bankruptcy court will have a slightly different view of what situations are hardships. However, there are certain common situations that courts may consider hardships for discharge purposes. Examples include:
- Losing a job
- Becoming injured
- Becoming very ill
- Unforeseen expenses
The bankruptcy court has leeway in deciding whether or not to grant your request for a hardship discharge.
Hardship Discharge Requirements
You must ask the court for a hardship discharge, and it's your burden to show it's warranted. Besides showing the hardship is beyond your control, you must show:
- Your case shouldn't be converted to a Chapter 7 case
- Modifying your repayment plan isn't practical
Conversion of Chapter 13 into Chapter 7
A Chapter 7 case is also called liquidation. The trustee sells your property, except for exempt property (which you keep), and gives the money to your creditors. A Chapter 13 case can be converted to Chapter 7 if your creditors haven't received payments worth what they would have been paid if your case had been filed under Chapter 7 in the first place.
If you've paid enough to get past this threshold, you're eligible for the hardship discharge, and the court won't convert your case to Chapter 7.
Repayment Plan Modification
Bankruptcy courts normally don't like to grant hardship discharges. They would rather see a repayment plan modified. If your difficult situation is just temporary, your plan may be extended or your payment amounts may be lowered. This change makes it possible for you to make your payments and for your creditors to receive the money they're owed.
Simple plan modification won't work in every case. A permanent illness or injury may prevent you from working and earning enough to make even modified payments. In addition, 60 months is the maximum legal length for a Chapter 13 plan. If your plan is already that long, the trustee can't change it by making it longer.
Discharge of Student Loans
If you have student loans, you're still responsible for them whether you file for bankruptcy or not. Student loans can't be discharged in either a Chapter 7 or Chapter 13 bankruptcy. However, federal bankruptcy law does provide an exception. The court can discharge your student loan debt if repaying it would be an undue hardship.
Bankruptcy courts are very reluctant to discharge student loans, and proving undue hardship is difficult. You must show you can't maintain a minimal standard of living if you're forced to pay back the loans. You must also show your circumstances are unlikely to change and you've made good faith efforts to repay the loans.
Questions for Your Attorney
- How should I document my need for a hardship discharge?
- If I'm seeking hardship discharge due to job loss, do I have to show the court I've been looking for a new job?
- Will medical expenses for a family member I support warrant a hardship discharge?