The hardship discharge is a great tool in chapter 13 bankruptcies to help debtors get a discharge when they cannot complete the chapter 13 for reasons outside of their control, such as becoming disabled or losing their job. The possibility of a hardship discharge is often overlooked, unknown or not correctly applied. Under §1328(b) U.S.C. a hardship discharge will be granted by the court if the following conditions are met:
1. Your creditors have received in your chapter 13 as much money as they would have received if you would have filed a chapter 7 bankruptcy case. If you have un-exempt equity, that un-exempt portion would need to be paid to a chapter 7 trustee. In a chapter 13 case it would be part of your plan payment and would have to be paid in full before you can apply for a hardship discharge.
2. The debtor cannot continue with his plan payments due to circumstances that are beyond his control and cannot held accountable for. Examples include losing your job, becoming ill or disabled for an extended period of time.
3. The last requirement is that a modification of the plan will not be practicable, meaning that amending the plan would not help the debtor to complete the plan.
One important effect of a hardship discharge is that the debtor will not receive the broader scope of the chapter 13 discharge but that of a chapter 7 discharge. That is important to remember. §1228(c) refers to §523(c) which excludes from discharge for example all debt incurred in a separation or divorce proceeding. If that was one of the reason the debtor filed a chapter 13 and not a chapter 7 bankruptcy case, the hardship discharge might not be beneficial to the debtor.