What is a Chapter 13 Hardship Discharge?

In the ordinary case, a chapter 13 discharge (which eliminates personal liability on debts) is granted shortly after the completion of plan payments. A hardship discharge under 1328(b) exists as an alternative way to discharge debts in a chapter 13 case when the unexpected or unfortunate has occurred. Several requirements must be met for a hardship discharge:

1. Post-confirmation

A hardship discharge is only available in a case where a chapter 13 plan has been confirmed. However, unlike a normal discharge, the plan payments need not have been completed.

2. Debtor not "justly accountable" for circumstances

The requirement of section 1328(b)(1) is that "the debtor’s failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable." Whether this test is met depends on the facts of why payments cannot be made. External forces outside the debtor's control are more likely to satisfy the requirement.

3. Liquidation test met

The chapter 13 liquidation test requires chapter 13 plans to pay to unsecured creditors what they would have received in a chapter 7 case. Many chapter 13 debtors would have had no asset chapter 7 cases, so the chapter 13 plan has no requirement due to liquidation. Requiring the liquidation test to be met prior to hardship discharge ensures that such a discharge does not disadvantage creditors over a chapter 7 discharge.

4. Modification of the plan not practicable

The code expresses a preference for modification of a chapter 13 plan over the granting of a hardship discharge. Modifications might include changing the plan length, altering payments or distributions, or altering how a secured debt is treated. Some plans have room to modify, while others are without modification options that would fit within the code requirements.

Effect of a Hardship Discharge

For most purposes, a chapter 13 hardship discharge is similar in scope and effect to a chapter 7 discharge.