By its very nature, bankruptcy signifies a certain level of financial hardship. After all, people only resort to filing for bankruptcy when they are already facing significant difficulties. But what happens if unforeseen circumstances arise in the midst of an ongoing bankruptcy case? Depending on your new set of circumstances, you may be eligible for a hardship discharge. What are the requirements for eligibility, and what should you consider in terms of benefits and drawbacks? Our team of experienced bankruptcy attorneys in Bucks County explores the answers to these questions.
Understanding the Concept of a Hardship Discharge
Life is unpredictable, and it doesn’t stop just because you’re dealing with bankruptcy. Fortunately, the law recognizes that circumstances can change unexpectedly. If your situation undergoes a significant transformation while your bankruptcy case is in progress, you may qualify for a hardship discharge.
Essentially, a hardship discharge is what it sounds like: an early discharge option available to debtors who encounter major obstacles to their original bankruptcy repayment plans. Under this discharge, your dischargeable, unsecured, non-priority debts are eliminated ahead of schedule, and you are released from the corresponding obligations in your initial repayment plan.
Before we delve into the criteria for debtor eligibility, let’s review the types of debts that may be included in a hardship discharge:
Dischargeable Debts: These are debts that can be eliminated at the conclusion of your bankruptcy case. Examples of dischargeable debts in Chapter 13 include credit card debt, medical bills, utility bills, and personal loans.
Unsecured Debts: These debts are not tied to any collateral, such as utility bills and medical bills. Secured debts, on the other hand, are backed by collateral, such as a mortgage or an auto loan. If you fall behind on secured debts, the respective creditors can foreclose on your home or repossess your vehicle.
Non-Priority Debts: Some debts take precedence over others when it comes to repayment. For instance, child support is considered a priority debt as it directly affects the well-being of the recipients. Other debts are deemed less urgent and are categorized as non-priority debts, including credit cards and personal loans.
To reiterate, secured debts, priority debts, and nondischargeable debts are not eligible for a hardship discharge.
Qualifying for a Hardship Discharge in Chapter 13 Bankruptcy
Now that you have a grasp of what a hardship discharge entails and its purpose, it’s time to determine if your specific case meets the necessary requirements. So, what are the eligibility criteria? According to 11 U.S. Code § 1328(b), there are three fundamental conditions:
Modifying your repayment plan should not be feasible. Chapter 13 bankruptcy involves a repayment plan that utilizes disposable income. However, if you lose your job during bankruptcy, your disposable income will be affected. In such cases, consult with your Philadelphia bankruptcy lawyer to determine if modifying your plan is possible. Modification may involve adjusting the payment schedule, payment amounts, or the distribution of repayments to creditors. A hardship discharge is only granted if modifying the repayment plan is not a viable option. Refer to 11 U.S. Code § 1328(b)(3).
The change in circumstances must be beyond your control. As per 11 U.S. Code § 1328(b)(1), failure to fulfill a repayment plan must be due to circumstances for which you cannot be held accountable. For example, if you were fired for unacceptable behavior resulting in job loss, the court will hold you accountable, and your request for a hardship discharge will be denied. Conversely, if you incur funeral expenses due to the passing of a loved one, it would be unreasonable to hold you accountable.
Your unsecured creditors must have received a minimum payment. Specifically, your unsecured creditors must have received at least what they would have received had you filed for Chapter 7 bankruptcy. See 11 U.S. Code § 1328(b)(2).
Note that the above requirements are not “either-or” choices. You must satisfy all three conditions to qualify for a hardship discharge.
Additionally, you should demonstrate that converting your case to Chapter 7 is not a viable solution. While Chapter 13 to Chapter 7 conversion is usually possible, it may be prohibited if you’ve already had a Chapter 7 discharge within the past eight years.
Contact Our Bankruptcy Attorneys in Pennsylvania Today
If you are currently going through Chapter 13 bankruptcy and encounter an obstacle, a hardship discharge or conversion to Chapter 7 may present a viable solution. To schedule a complimentary case evaluation with our experienced bankruptcy attorneys at Young, Marr, Mallis & Associates, call (609) 755-3115 in New Jersey or (215) 701-6519 in Pennsylvania today.