Chapter 13 bankruptcy requires that a debtor make payments to a trustee for three to five years under a repayment plan filed by the debtor at the beginning of their bankruptcy case. At the end of the plan the debtor receives a discharge of any remaining dischargeable debts. Sometimes a debtor files chapter 13 bankruptcy, makes payments for awhile, but then their circumstances change and they are unable to continue making payments. When this happens there are a few options. First, the debtor can convert the bankruptcy case to a case under chapter 7. Conversion requires that a debtor file new schedules and statements with the court and attend another 341 meeting with a trustee. Second, the debtor can file a plan modification and lower their plan payment. This option is only available if the debtor’s plan provides for payments to unsecured creditors. If this is the case, the debtor can modify their plan to reduce payments to unsecured creditors, provided they can show that they can still afford payments to the secured and priority creditors listed in their plan.
There is a third option, known as the “Hardship Discharge” which is much simpler, quicker, and less costly than a plan modification or conversion. Section 1328(b) of the Bankruptcy Code allows chapter 13 debtors who have not completed their plan to receive a discharge if they meet three requirements. First, the debtor’s failure to complete their plan must be due to circumstances for which the debtor should not justly be held accountable. For example, if a debtor is laid off from their job or becomes sick and can no longer work. Second, the value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7. This means that if the debtors had nonexempt property when they filed their chapter 13 case, they must have paid enough money during their chapter 13 case to provide the unsecured creditors payments equal or greater than the value of the nonexempt property. Third, modification of the plan is not practicable. Generally this means that the debtor is not earning enough to support a chapter 13 plan payment, or the debtor does not have disposable income to be paid to the unsecured creditors and there are no secured or priority claims to be paid in the plan.
Use of the hardship discharge is limited to very specific circumstances. Most chapter 13 debtors will resolve changes in their financial situation by filing a plan modification or a conversion, but for those debtors that meet the above requirements, the hardship discharge provides a quick and inexpensive way to petition the court to receive a discharge without completing their chapter 13 plan.
Bankruptcy is a very complex legal field. Before making the decision to file bankruptcy you should consult an experienced bankruptcy attorney. For more information about filing a bankruptcy in north Texas, contact The Wright Firm, L.L.P. at 469-635-6900 or visit our websites at www.thewrightlawyers.com or www.northtexas-bankruptcy.com.
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