Debtors must pay all payments required under their Chapter 13 plan in order to receive a discharge in Chapter 13 bankruptcy. However, there is an exception to this rule known as the "hardship discharge." Section 1328(b) of the Bankruptcy Code allows Chapter 13 debtors to receive a discharge without completing their plan if they satisfy three prerequisites.
First, the debtor must be unable to continue making payments to the trustee and circumstances beyond the control of the debtor must be the cause of their inability to complete their Chapter 13 plan. For example, if a debtor is injured in a car accident and unable to work this requirement would be satisfied.
Second, as of the date the debtor requests a hardship discharge they must have paid to their creditors an amount equal or greater than what they would have received if the debtor had filed a Chapter 7 bankruptcy case. In Chapter 7 bankruptcy cases the debtor must give her nonexempt property to a trustee who liquidates the property and pays the proceeds to the unsecured creditors listed in the schedules. In Chapter 13 bankruptcy cases the trustee does not liquidate the debtor's nonexempt property. Instead the trustee requires that the debtor pay an amount equal to the value of the nonexempt property to the unsecured creditors in the Chapter 13 plan. If the trustee has been paid an amount in the plan that provides the unsecured creditors distributions equal or greater than the value of the nonexempt property, then this requirement has been met.
Third, it must be impractical to modify the existing Chapter 13 plan. Plans can be modified to reduce the payment when the debtor's income decreases. If the income available to the debtor is so low that even a minimal payment cannot be paid then this rule is satisfied.
Most debtors will not qualify for a hardship discharge and will have to modify a plan or convert the case to a case under Chapter 7 of the Bankruptcy Code. But for debtors who do qualify, the hardship discharge provides an inexpensive way for a debtor to acquire a discharge quickly with no additional payments to the trustee.
Nathan S. Graham is an attorney with The Wright Firm, LLP. Nathan represents individuals and small businesses in Chapter 7 and Chapter 13 bankruptcy cases. The Wright Firm, LLP, has offices in Dallas, Denton, Lewisville, and Frisco.
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