When the Unexpected Prevents You from Completing your Chapter 13 Bankruptcy Payment Plan
A Chapter 13 bankruptcy is a “payment plan” bankruptcy requiring to pay what you can afford to pay (after household expenses are considered) to your creditors within a specific period of time.
Whatever you don’t pay to your creditors in that period of time is discharged—meaning you never have to pay under force of Federal law—just as your (dischargeable) debt is in a Chapter 7 bankruptcy.
A Chapter 13 bankruptcy usually lasts no fewer than 36 months and no more than 60 months (from the date of “confirmation,” or approval by the court, of your Chapter 13 plan here in the Eastern District of Michigan).
Making the monthly payments required by a Chapter 13 bankruptcy payment plan requires, naturally, that you have ongoing income and/or the ability to earn income throughout the life of the Chapter 13 payment plan.
What happens when some tragedy strikes to prevent you from earning that income?
The “hardship discharge” is a possibility.
What Is the Hardship Discharge?
The hardship discharge is an “early release” from the Chapter 13 bankruptcy process—at least insofar as the remaining payment term of the Chapter 13 plan goes. It is a somewhat more limited discharge, however, than you would have gotten if you’d actually completed the payment plan, and, naturally, there are also some restrictions.
The Bankruptcy Code (the Federal law governing the bankruptcy process) allows a “hardship discharge” if:
- Your plan has already been confirmed (approved) by the bankruptcy court;
- Your failure to complete the plan is due to circumstances for which you are not responsible;
- The funds distributed to your creditors thus far in your plan meets or exceeds what they would have received if you had filed a Chapter 7 bankruptcy and had some non-exempt property seized and liquidated (which does not happen in a Chapter 13);
- And simple modification of the terms of your plan is not practicable.
Certain debts that are not dischargeable in Chapter 7 bankruptcy but which are under Chapter 13 may not be fully discharged via hardship.
There also remains the obligation to complete the post-filing “debtor education” course in order to obtain a hardship of any sort (though this requirement may sometimes be waived by separate motion filed by your bankruptcy attorney).
What Sorts of Hardship Qualify for the Hardship Discharge?
This will always be a necessarily fact-based question, and it is one that may need to be resolved via evidentiary or other hearings before your bankruptcy judge.
What Judge X finds to be a qualifying hardship may not be what Judge Y finds qualifying, and there are many examples of specific hardships for specific Chapter 13 debtors throughout the bankruptcy court system’s body of case-law.
What is important to know is that it is not going to be a simple inability to pay. What caused the inability to pay? An auto accident resulting in total paralysis or a job-loss resulting from telling your boss what you really think of him?
In one actual case filed many years ago in the Eastern District of Michigan, the debtor’s bankruptcy attorney obtained a Chapter 13 hardship discharge for her after she had suffered a terrible assault and battery while on vacation in Mexico, leaving her terribly damaged not only physically but psychologically.
Judges will universally apply a high bar to this question. It is one of the reasons that it is highly inadvisable to attempt to file a Chapter 13 bankruptcy without retaining an experienced bankruptcy attorney to represent you.
IS DEATH STILL THE ULTIMATE HARDSHIP?
One Michigan bankruptcy judge, now retired, famously opined in a decision granting a hardship discharge to a debtor who had died that “death is the ultimate hardship.”
Does this remain true in the Eastern District of Michigan Bankruptcy Court?
A more recent decision by Chief Judge Shefferly was more nuanced as to whether or not to grant a hardship discharge in a case in which the debtors had passed on.
In this case, a married couple who had jointly filed a Chapter 13 both passed away within a year of each other. Their son, the Michigan state court-appointed personal representative of his parents’ estate, filed a motion for a hardship discharge in his now-deceased parents’ bankruptcy proceeding.
The Chapter 13 Trustee, for his part, filed a motion to dismiss the case as it was only 80% or so current in terms of Chapter 13 Plan payments and no further income—obviously—would be flowing in from the debtors.
Judge Shefferly reviewed not only the language of the US Bankruptcy Code allowing for a hardship discharge but also a Federal Rule of Bankruptcy Procedure providing that neither a Chapter 7 nor a Chapter 13 bankruptcy case ends simply because the debtor has died.
When a debtor in Chapter 13 has not suffered a mere hardship but has actually deceased, this further Code provision requires, Judge Shefferly held, a further analysis as to whether or not the further administration of the Chapter 13 case is possible and whether it is in the best interest of the parties.
Judge Shefferly crucially held that “administration” does not merely mean the receipt and disbursement of money (the Chapter 13 Trustee’s primary argument being that there was none in this case to do anything with).
He examined the best interests of all of the potential parties in interest in that Chapter 13 case—including the deceased debtors’ post-filing creditors. That is, the creditors of the probate estate who otherwise played no role in the Chapter 13 proceeding, which sweeps in only creditors to whom the debtors owed money prior to the filing of the case.
Judge Shefferly further required that a post mortem motion for a Chapter 13 hardship discharge must be filed by a personal representative duly appointed to that role by a Michigan state court, pursuant to state law.
In that case, the motion for Chapter 13 hardship discharge was granted—but only after a 21-page analysis examining the specific facts of these debtors, their assets, each and every one of their creditors, and the legality of their son’s appointment as estate personal representative.
The upshot of this case is that it a motion for Chapter 13 hardship discharge will require less judicial review if the debtor is very badly injured than if the debtor is actually killed.
In the former instance—injury or other non-life-terminating but grievous hardship—only the Bankruptcy Code provision dealing with the hardship discharge will be implicated.
In the latter instance—death—the hardship discharge will require the Procedural Rule analysis layered on top.
And, at the end of the day, in either case, it will always be the Bankruptcy Judge’s discretion whether or not to grant the motion.
THE CHAPTER 13 BANKRUPTCY HARDSHIP DISCHARGE: A BOTTOM LINE
The bottom-line is that, if you plan on or think that you might file for bankruptcy, consult an experienced Michigan bankruptcy attorney before filing a Chapter 13 bankruptcy.
Attorney Walter Metzen has represented thousands of consumers in Chapter 7 and Chapter 13 bankruptcy cases in Michigan. A Board Certified Bankruptcy Expert, Attorney Metzen has dealt with bankruptcy and business ownership issues for over 28 years.
The Law Offices of Walter A. Metzen & Associates offers free consultations for those interested in the bankruptcy process in Michigan and is experienced in determining and advising as to the best course of action when filing a Chapter 7 or Chapter 13 bankruptcy in Michigan.