Living on the tight budget required by a Chapter 13 bankruptcy is not easy in the best of circumstances. It’s especially hard—if not impossible—after an unexpected drop in income from a job loss or disability. If you find yourself unable to complete your plan due to no fault of your own, you can ask the court to end your bankruptcy early and to wipe out your dischargeable debt with a hardship discharge.
How to Get a Hardship Discharge
When you file for Chapter 13 bankruptcy, you agree that you’ll pay your creditors all of your disposable income (the amount left over after paying for your living expenses) for three to five years. In exchange, at the end of your plan, the remaining balance on your dischargeable, unsecured debt—such as credit card balances, personal loans, and medical bills—will be wiped out.
If your disposable income changes, however, you can ask the court for a hardship discharge by filing a motion in the bankruptcy court. The court grants your motion if you’re able to prove each of the following:
- The total amount paid to unsecured creditors was equal to the amount they would have received in a Chapter 7 bankruptcy.
- Your failure to complete the plan was due to a situation that was out of your control—such as a death in the family, illness, job layoff, or natural disaster—and that it wouldn’t be fair to hold you accountable for the debt, and
- A modification of the plan is “not practicable” (you don’t have enough disposable income to make a reduced plan payment).
Let’s look more closely at each of these requirements.
Determining whether you’ve paid enough into your plan
Before the court grants a hardship discharge, you must prove that you’ve already paid your unsecured creditors an amount equal to your “nonexempt” property. Here’s how this works.
When you file for bankruptcy, you can “exempt,” or keep, the amount of property on your state’s exemption list. Exempt property usually includes a modest car, household furnishings, and other personal belongings, such as clothing. “Nonexempt” property includes property that is not on your state’s exemption list, or that exceeds the property’s permissible exemption amount.
You can figure out the amount of your nonexempt property by reviewing three of your bankruptcy schedules, starting with Schedule A/B: Property, the form on which you listed all of your assets. You’ll subtract the value of the assets you exempted on Schedule C: The Property You Claim as Exempt, along with any loans listed on Schedule D: Creditors Who Have Claims Secured by Property. The value of your remaining “nonexempt” property is the amount you’re required to pay to unsecured creditors to receive a discharge.
Example. When Alex filed for Chapter 13 bankruptcy, he exempted all of his personal belongings, but not all of the equity in his house. Specifically, he owed $300,000 on a home worth $400,000. He claimed the maximum state homestead exemption amount of $75,000. Deducting the debt and the homestead exemption from the value of the home left Alex with $25,000 in nonexempt assets. Therefore, Alex must pay $25,000 to unsecured creditors to receive a discharge.
Circumstances beyond your control
You need to show that your income declined or expenses increased due to circumstances beyond your control. You can satisfy this requirement by demonstrating that you suffered a catastrophic event, such as a death in the family or permanent disability; or if you are unable to work for an extended period due to a layoff or illness. The key is that the circumstances must be beyond your control. If you voluntarily quit your job to return to school, for example, you won’t qualify for a hardship discharge.
Modifying your plan is not practicable
To satisfy this requirement, you must show that a plan modification that reduces your monthly plan payment is not practical or feasible. If you cannot complete plan payments because of a layoff or illness, you will have to show that the situation is unlikely to improve in the near future. Other reasons preventing you from modifying your plan might include demonstrating that your expenses increased and that you cannot afford your ongoing living expenses.
Other Options: Converting to Chapter 7
If the court finds that you are not eligible for a hardship discharge, and you aren’t able to modify your plan, you might be able to convert your case to Chapter 7 (although you risk losing property), or dismiss your case altogether.
If you are not familiar with the options available to you, an attorney who regularly practices in your local court can advise you about the solution that is best for you.
Questions for Your Attorney
- If I convert my case to a Chapter 7 bankruptcy because I didn’t pay enough to my creditors, will the trustee sell my nonexempt property?
- If I haven’t paid enough into the plan to catch up on my mortgage, and I receive a hardship discharge, will I lose my house?
- I filed for Chapter 7 bankruptcy six years ago—do I qualify for a hardship discharge?