A chapter 13 hardship discharge is a way of being released from a chapter 13 bankruptcy plan earlier than expected before the payment plan is completed. That sounds ideal, but it does come with several restrictions. Here’s what you need to know.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a reorganization and restructuring of someone’s debts. When someone cannot keep up with the debts but feels they have the chance to repay most or all of them, they can file for chapter 13. This can be a good route for someone with a steady income to consolidate debts and make payments to a trustee rather than the creditors. It also can stall the foreclosure of a home.

What Happens if I Can’t Make the Chapter 13 Payments?

When the bankruptcy court agrees to chapter 13 bankruptcy, they’ve done their due diligence about the debtor’s income and what they need for living essentials (housing, food, clothing, transportation to work if relevant). The debt is restructured accordingly, and if the debtor continues receiving their income, they’re expected to finish the chapter 13 process. There’s no grace period as there is with many types of loans. As soon as the debtor misses a payment, the court trustee may have the bankruptcy dismissed for nonpayment. This is not good news because the court reinstates the original debts, and any protections chapter 13 provided (putting off foreclosure) are revoked.

What if I Can No Longer Afford to Make the Chapter 13 Payments?

Suppose the debtor can no longer afford to make the chapter 13 payments because of an unforeseen circumstance such as a long-term medical issue or loss of a job, so income is either gone or reduced. In that case, the debtor can apply for a chapter 13 hardship discharge. The court would discharge the debt early with no further requirements if granted.

What Are the Requirements for a Chapter 13 Hardship Discharge?

Debtors must prove three things to the bankruptcy court to be eligible for early discharge.

Circumstances Are Beyond the Debtor’s Control. The debtor must prove that more than a temporary job loss or medical condition is involved. There must be reasons why the debtor can no longer expect to earn a reasonable living for an extended period.

Did Unsecured Creditors Receive Adequate Payment? If what you’ve paid into the plan is at least what unsecured creditors would have received from a chapter 7 bankruptcy, the discharge may be approved. But this can be difficult to prove, and an experienced bankruptcy attorney is recommended to help.

The Repayment Plan Can’t Be Modified. Some plans can be modified and still work toward repayment. However, if the loss of income is deemed long-term, modifying the plan won’t help, and the court is more likely to consider early discharge.

Let Us Advise You

If you or someone you know needs help filing for bankruptcy, call us at 708-575-1500 to work with one of our experienced bankruptcy attorneys.