When a debtor files for Chapter 13 bankruptcy, one of their biggest fears is that they won't be able to maintain the repayment plan due to a job loss or significant reduction in income. Because the Chapter 13 bankruptcy repayment period lasts from 3 to 5 years, the fear of a job loss during that time is not unreasonable; however, Chapter 13 bankruptcy has built in mechanisms that protect the debtor in case of a job loss or other crisis. One of those mechanisms is the "hardship discharge" available in Chapter 13 bankruptcy. The "hardship discharge" allows the debtor to discharge their debts while not converting the case to a Chapter 7 bankruptcy. How does the "hardship discharge" work in Chapter 13 bankruptcy?
- When a bankruptcy court grants a debtor a hardship discharge while in Chapter 13 bankruptcy, the debtor will be able to wipe out all of their debts with the exception of priority debts such as domestic support and some tax obligations.
- In order for a debtor to qualify for a hardship discharge in Chapter 13 bankruptcy, he/she must pass the "best interests of the creditors" test. What this means is that creditors must receive what they would have been paid in a Chapter 7 bankruptcy.
- A debtor will only receive a hardship discharge in Chapter 13 bankruptcy if they are unable to complete the bankruptcy repayment plan for reasons that are outside of their control. For example, the death of a debtor (such as the debtor-spouse), the debtor's ill health or a job loss would easily fall into reasons that are outside of the debtor's control.
One of the best benefits of the hardship discharge in Chapter 13 bankruptcy is that once a debtor receives the discharge they can immediately file for Chapter 13 bankruptcy again. This allows a debtor to revisit the Chapter 13 bankruptcy option when they are better suited to complete the repayment plan.