Chapter 13 bankruptcy is a reorganization bankruptcy in which you propose a repayment plan. The repayment plan allows you to make payments as agreed upon over three to five years. At the end of your repayment plan, you can have your outstanding qualifying debts discharged. However, your circumstances can change, making it challenging to keep up with your payments under the repayment plan. In this case, it is advisable to learn more about bankruptcy hardship discharge and whether you are eligible.
What is Bankruptcy Hardship Discharge
A hardship discharge allows an early conclusion of a Chapter 13 bankruptcy case without making all payments under the repayment plan. It is different from the standard bankruptcy discharge that happens after the filer has made every payment. Additionally, it does not apply to Chapter 7 bankruptcy cases.
However, bankruptcy courts grant hardship discharge in exceptional cases. You must meet the following conditions:
Circumstances Beyond Your Control
You did not complete the payment plan due to circumstances beyond your control. You must prove that the circumstances were beyond a physical disability or a short-term loss of employment. Demonstrating that your condition is permanent can require medical proof.
Bankruptcy courts analyze hardship discharge motions thoroughly. Some of the circumstances that could qualify include the following:
- An injury or long-term disease that hinders your continued employment
- Significant, unexpected financial changes that make repayment plan modification impossible
- The incapacity or demise of your household breadwinner
Your hardship should be permanent, and you should prove a good-faith effort throughout your case.
You Repaid Creditors
According to the payments you have made into your plan, unsecured creditors should have received what they may have received if you had brought a Chapter 7 bankruptcy.
Modifying the Payment plan is Not Practical
To satisfy this criterion, you need to prove to the court that you do not have sufficient funds to pay towards any modified plan.
If circumstances change after bringing your Chapter 13 bankruptcy case, the law permits you to modify your plan. For instance, if your income reduces during bankruptcy, you can modify the plan to lower your payment amount.
A judge can only lower the amount you are paying towards unsecured debt, personal loans, and priority debt. If you are not repaying much towards these debts, which is not uncommon, the amount that the bankruptcy court could lower the payment by could be insufficient. In this case, you meet the requirement to modify your repayment plan, as it is not practical or feasible.
If you are ineligible for any hardship discharge, it may be because you are required to pay additional money to the unsecured creditors. Therefore, you can change a Chapter 13 bankruptcy to a Chapter 7.
Debts that Hardship Discharges Will Not Eliminate
If the bankruptcy court grants you the hardship discharge, the court will only discharge your unsecured nonpriority debts. Debts that the court will not eliminate include the following:
- Student loans
- Arrears for secured obligations
- Debts not included in the bankruptcy documents
- Restitution or fines following criminal proceedings
- Priority debts, including recent taxes and domestic support
- Liabilities for personal injury or death due to intoxicated driving
- Alimony, child support, and debts after your separation or divorce decree
- Secured debts if you keep your property, including a vehicle or house payment
- Debts for special evaluations you owe to a cooperative association or condominium
- Obligations you could not discharge in prior bankruptcy proceedings because of misfeasance or fraud.
- Most local, state, and federal taxes, including borrowed money or credit card charges to settle those taxes.
- Debts you owe to a pension, stock bonus, or profit-sharing plan
Debts that Remain If Your Creditor Objects Successfully
After a hardship discharge, some of your debts can be eliminated unless a creditor files and wins a civil suit or adversary proceeding.
Here are the debts that your creditors can object to:
- Debts you incurred through fraudulent activities, for example, using credit cards with the knowledge that you could not pay the fees.
- Debts resulting from a deliberate and willful injury you inflicted on someone else or property
- Debts stemming from embezzlement, fiduciary duty (abuse of trust), or larceny
Hardship Discharge Procedure
A person who filed a Chapter 13 bankruptcy case and later wants a hardship discharge should file specific documentation with the trustee and the court. The section below discusses the procedures you should follow when requesting a hardship discharge in your Chapter 13 case.
You should complete a Motion for Entry of Hardship Discharge. You should also include a statement with reasons why you cannot complete the repayment plan in your motion. Once you bring your motion to the bankruptcy court, you should serve the trustee, every creditor, and any person with an interest in your case with a copy. You should file your proof of service with your motion.
You should fill out a form that requires you to disclose information regarding your domestic support responsibilities and send it to your bankruptcy trustee. You will not file this form with the bankruptcy court.
The clerk will analyze your motion and check whether you have filed the Certificate of Financial Management as well. If you have, the court will issue an order setting a deadline for filing complaints for debt dischargeability and scheduling a hearing. Your creditors will be given a thirty-day notice of your deadline. The court will send the order to you, your creditors, interested parties, and the trustee.
If you have not filed your Certificate of Financial Management, the clerk will contact your lawyer requesting the fulfillment of this requirement.
After your hearing, the court will enter an order that either denies or grants your motion. Regardless of the outcome, the clerk will serve it to all interested parties and creditors.
If the judge grants your motion, the bankruptcy trustee will later bring a Trustee's Notice of Filing of Final Report and Chapter 13 Trustee Final Report. The trustee should serve the creditors with the notice. The notice informs the parties that they have thirty days to oppose the report.
If no party files an objection, the clerk will make the final verdict, discharging the bankruptcy trustee and closing the bankruptcy case. However, if there are objections, the clerk will schedule a hearing.
Hardship Discharge Objections
Some of the main reasons why creditors object to hardship discharge are as follows:
- Fraud—If your creditor believes you defrauded them to acquire debt or that you used the credit to defraud another person, they are more likely to object to your hardship discharge.
- Bankruptcy abuse—Your creditor can object to the discharge if they think you made a cash advance or luxury purchase before filing your hardship discharge motion.
Creditors become defensive of the credit you owe them because they want to safeguard their investment. The most effective way to handle the objection is to retain a seasoned lawyer who can respond to the objections and defend your interests in court.
Preparing to Compete Your Bankruptcy Hardship Discharge Forms
Completing the bankruptcy forms requires the following:
Understand the Law
Since the forms do not expound on the ramifications of the information you give, you should understand what can happen to your property and debts.
Ensure you comprehend the bankruptcy laws before filing your hardship discharge motion, and whether you are eligible for the discharge.
Bankruptcy proceedings require a comprehensive understanding of bankruptcy laws. Filing for bankruptcy can lead to the loss of your property or even a criminal investigation. Ensure you consult a knowledgeable bankruptcy attorney for professional assistance.
Hiring Services and Tools for Bankruptcy Preparation
If you want help, a bankruptcy preparer can assist. The services could be immensely helpful if you feel overwhelmed by the process of filling out the bankruptcy forms. The service provider can organize your financial documents.
You can search for bankruptcy preparation services via law offices and online. The preparation service provider will also:
- Confirm whether you have relevant financial documents
- Analyze the form requirements and questions
- Input details in an orderly and consistent way
Ensure the essential forms are ready for signing, filing, and printing
You should reveal every relevant detail honestly and properly file the forms.
Please note that a bankruptcy preparer is banned from offering you legal advice or elaborating on bankruptcy law. To avoid risking the case, consider hiring an experienced bankruptcy attorney.
Find Bankruptcy Court
Bankruptcy falls under federal law. Therefore, you will not file your case in a state court.
You can use the Federal Court Finder tool to find your nearest bankruptcy court. You should bring your motion in the federal district in which you have resided for more than six months.
How to File Your Bankruptcy Paperwork
If you are self-representing, visit the court's official website for filing guidelines and learn where to file your paperwork through the court's dropbox, by mail, or in person.
You should also learn how many copies to file, how to organize your paperwork, and any other requirements, including whether you can punch, paperclip, or staple it.
Your lawyer will prepare your motion for your analysis and signature before you file it electronically with the bankruptcy court.
Mistakes to Avoid When Filing a Hardship Discharge Motion
Here are mistakes to avoid when filing your hardship discharge motion:
Do Not Withdraw Your Retirement Funds Before Filing the Motion
Almost every tax-deferred retirement plan is safeguarded in bankruptcy. Consequently, one error you can make is withdrawing your retirement funds before filing your hardship discharge motion. You are more likely to be in a better financial position if you fire the motion before exhausting the nest egg.
You should hire a competent bankruptcy lawyer if you intend to file the motion. They will advise you accordingly.
Failing to Hire an Attorney
Most individuals attempt to save money by bringing a bankruptcy hardship discharge motion on their own. After all, they are facing financial struggles, so they believe they cannot afford a lawyer. However, failing to seek legal assistance can be costly and lead to life-altering consequences.
You can obtain the relevant paperwork, and think you have everything you need to complete and submit them. The truth is that the paperwork is complicated, making mistakes easy. Your lawyer can fill out the forms accurately and fight for your interests. They can also guide you, reducing the chances of mistakes and improving your chances of success.
Other benefits of hiring an attorney are as follows:
- They will handle your creditors' objections
- Evaluating alternatives—If hardship discharge is impossible to achieve, your lawyer can explore other legal options, including case conversion to Chapter 7 and case dismissal
- Your lawyer will give you an objective opinion on the possible case outcome and advise you on life after hardship discharge.
- They will prove your eligibility for hardship discharge before the judge
Do not Transfer or Hide Assets
Transferring an asset for less than its worth or gifting it to another person before filing your hardship discharge motion is deemed a fraudulent transfer. The bankruptcy trustee can find these transactions, recover your property, and recommend denial of your motion. You can also face criminal charges.
Do not Provide Inaccurate, Misleading, or Incomplete Information
Providing incomplete or inaccurate details on your motion can lead to hardship discharge denial. Any deliberate concealment is considered bankruptcy fraud. Ensure you are transparent. It is better to disclose everything and allow your lawyer to determine how to protect you.
Find an Experienced Bankruptcy Attorney Near Me
When filing a Chapter 13 bankruptcy case, you cannot predict the future. You also cannot expect to face a challenging financial situation that hinders you from making the required payments. When this happens, you can apply for a bankruptcy hardship discharge that requests the court to terminate your repayment plan early due to circumstances beyond your control.
If this is your current situation, the qualified team at Sacramento Bankruptcy Lawyer can help you determine whether you qualify to file this motion, represent you before the court, and guide you through completing and filing the relevant paperwork. Please contact us at 916-800-7690 to learn more during your initial consultation.
