Living on the tight budget required by a Chapter 13 bankruptcy isn’t easy in the best circumstances and can be impossible after an unexpected drop in income. If you are unable to complete your plan due to no fault of your own, you can ask the court to end your bankruptcy early and wipe out your dischargeable debt with a hardship discharge.
What Is a Bankruptcy Hardship Discharge?
When you file for Chapter 13 bankruptcy, you agree to pay your creditors your "disposable income" or the amount left over after paying for allowed living expenses for three to five years. In exchange, any balance that remains on your dischargeable, unsecured debt—such as credit card balances, personal loans, and medical bills—gets wiped out at the end of your plan.
However, if you suffer a job loss, injury, or disability, your income will likely change. If you can’t keep your payments up, you might be able to save your bankruptcy case by requesting a hardship discharge. A hardship discharge allows you to erase qualifying debt without completing the plan.
How to Get a Hardship Discharge
The first step is to file a motion in the bankruptcy court. The court will grant the motion if you can prove each of the following:
- The total amount paid to unsecured creditors equals 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 it wouldn’t be fair to hold you accountable for the debt, and
- A plan modification is “not practicable” (you don’t have enough disposable income to make a reduced plan payment).
Here’s an explanation of each requirement.
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 like clothing. “Nonexempt” property includes property not on your state’s exemption list, or that isn’t fully covered by a property exemption (property can be partially exempt).
You can determine 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 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 must 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 home's value 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. For example, you won't qualify for a hardship discharge if you voluntarily quit your job to return to school.
Modifying your plan is not practicable
To satisfy this requirement, you must show that a modification reducing your monthly plan payment is not practical or feasible. If you cannot complete plan payments because of a layoff or illness, you must show that the situation will unlikely improve shortly.
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 can’t 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, a bankruptcy attorney who regularly practices in your local court can advise you about the best solution for you.
Questions for Your Attorney
- If I convert my case to a Chapter 7 bankruptcy because I didn’t pay my creditors enough, will the trustee sell my nonexempt property?
- If I haven’t paid enough into the plan to catch up on my mortgage and 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?