Discharge with Chapter 13

When a debtor completes their Chapter 13 bankruptcy, the discharge eliminates all of the remaining balances owed on the general unsecured debts that were provided for in the bankruptcy Plan.

The unsecured debts receive a payment that reflects what the debtor could reasonably afford. A limitation of a Chapter 13 Plan is that it is required to pay the unsecured debts at least as much as the creditors would have received if the debtors non exempt assets had been liquidated under a Chapter 7 bankruptcy. This can be payment in full, a percentage of the claims, or even under the appropriate situations, nothing.

Distinctions Between Chapter 7 and Chapter 13

The bankruptcy law passed in 2005 made some changes to Chapter 13 discharge. Prior to the change, Chapter 13 discharge was much broader than Chapter 7 discharge. While Chapter 13 discharge remains broader, the law considerably narrowed the differences.

Debts that are nondischargeable under Chapter 7 are now nondischargeable under Chapter 13, except for some exceptions, including the following: debts (other than support related debts) that arise from a divorce or separation agreement, and debts that arise from a willful or malicious injury caused by the debtor (unless there has already been restitution or damages awarded in a civil action against the debtor).

Hardship Discharge

Sometimes circumstances arise, preventing the debtor from completing the plan. When this happens the debtor may ask the court to grant a “hardship discharge.”

When is Hardship Discharge Available?

A Hardship discharge is available only if the following occur:

  1. A debtor’s inabilityto complete plan payments is because of circumstances that are not in debtor’s control and occur through no fault of the debtor; and
  2. Creditors have received at least as much as they would have if the debtor had filed for Chapter 7 liquidation case; and
  3. Modification of the plan is not possible.

Sometimes injury or illness that precludes employment sufficient to fund even a modified plan can serve as leverage for a hardship discharge.