Central Kentucky Personal Injury & Civil Litigation Attorneys

Bankruptcy Newsletter

The Chapter 13 Debtor and the "Hardship Discharge" in Limited Circumstances

Chapter 13 bankruptcy allows a debtor to reorganize debt according to a court-approved repayment plan, which provides for the scheduled repayment of the debtor’s creditors. Upon completion of all payments, the debtor receives a “superdischarge” from all debts provided for by the plan.

In limited circumstances, when the Chapter 13 debtor is unable to complete all payments required by the plan, the debtor may request the court to grant a “hardship discharge.”

When a “Hardship Discharge” is Permitted

Under Section 1328 of the Bankruptcy Code, a “hardship discharge” is available to a debtor that has not completed payments under a Chapter 13 plan, only if all of the following conditions are satisfied:

  1. The debtor’s failure to pay is due to circumstances for which the debtor should not justly be held accountable;
  2. The creditors received at least as much as they would have received if the debtor’s estate had been liquidated under Chapter 7; and
  3. Modification of the plan is not practicable.

Non-Dischargeable Debts

The benefit of a Chapter 13 “hardship discharge” is that it allows the debtor to retain assets which would have been liquidated in a Chapter 7 case. However, the grant of a “hardship discharge” prohibits the debtor from taking advantage of the broad Chapter 13 “superdischarge” that would have otherwise been available.

Rather, the debtor is limited to the same discharge he would have received under Chapter 7. Specifically, upon being granted a Chapter 13 “hardship discharge,” the debtor will not be discharged of debts that are the result such improprieties as:

  • Fraud
  • Willful and malicious injury
  • Death or personal injury caused by the debtor’s drunk driving

Furthermore, a “hardship discharge” does not discharge the debtor from debt on claims where the last payment is due after the date of the final payment under the plan.

Other Limitations

Section 1328 prevents the court from granting a discharge in the following cases:

  • In a case filed under Chapter 7, 11, or 12 during the 4-year period preceding the date of the order for relief; or
  • In a case filed under Chapter 13 during the 2-year period preceding the date of such order.

Furthermore, the debtor must complete an instructional course concerning personal finance management before any discharge can be granted. In addition, the court may not grant a discharge until after a hearing in which the court determines that there is no reasonable cause to believe:

  • Section 522(q)(1) may be applicable to the debtor; and
  • There is pending any proceeding in which the debtor may be found guilty of a felony which, under the circumstances, demonstrates that the filing of the case was bankruptcy abuse or liable for a debt arising from
    • a violation of any Federal or State securities laws
    • fraud, deceit, or manipulation in a fiduciary capacity
    • violation of the Racketeer Influenced and Corrupt Organizations (RICO) statutes
    • and any criminal act, intentional tort, or willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.

Note: “racketeering activity” means any act or threat involving murder, kidnapping, gambling, arson, robbery, bribery, extortion, dealing in obscene matter, or dealing in a controlled substance or listed chemical, which is chargeable under State law and punishable by imprisonment for more than one year as well as any act involving violations of similar Federal law.

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