The Chapter 13 Bankruptcy Hardship Discharge

Understanding the Chapter 13 Hardship Discharge

A Chapter 13 bankruptcy plan is difficult to complete just because of the length of the plan (3-5 years). As I’ve always told clients and law students in my bankruptcy law courses, a lot can happen in five years that prevents a debtor from completing the plan, even those with the best of intentions.

For example, there could be job loss, relocation, major illness, or a sudden disaster that can render a confirmed plan impossible. Even a global pandemic could derail your financial plans.

For debtors who now face circumstances beyond their control, the Bankruptcy Code offers a path to relief known as the Hardship Discharge under 11 U.S.C. §1328(b).

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

The Core Requirements for Hardship Discharge

Unlike a successful regular discharge that is accomplished by completing the plan payments, the hardship discharge is more limited and is granted at the discretion of the court only if the debtor meets strict statutory requirements.

Requirement	Explanation
1. Unavoidable Circumstances	The debtor’s failure to complete plan payments must be due to circumstances beyond the debtor’s control. This is the core “hardship” test, requiring an unexpected, material, and permanent change in the debtor’s financial situation.
2. Best-Interests-of-Creditors Test Met	The payments received under the plan for unsecured claims cannot be less than the amount that would have been paid if the estate had been liquidated under Chapter 7. In short, unsecured creditors must have received at least what they would have in a Chapter 7 liquidation. This is also known as the Chapter 7 Liquidation Test.
3. Plan Modification is Not Practical	The court must find that plan modification is not possible. This means the debtor must have explored the possibility of lowering the plan payment.

What Qualifies as “Circumstances Beyond the Debtor’s Control”?

This first requirement is the most crucial. Courts are looking for a significant, involuntary change that permanently prevents the debtor from generating income sufficient to pay into the plan or requires an increase in non-debt expenses.

Common examples that courts often recognize as meeting the unavoidable circumstances test:

Medical Events and Issues

The most common reason and easiest to prove is a long-term, disabling, or fatal medical condition affecting the debtor.

Permanent Disability: A sudden injury or onset of a serious illness such as suffering a stroke, cancer, or permanent work injury that results in the permanent loss of the debtor’s ability to work or results in a severe reduction in earning capacity.

Excessive, Ongoing Medical Costs: A chronic medical condition requiring continuous, expensive treatment that makes the plan payment impossible, even if the debtor is still working.

Involuntary Loss of Income

This must be a permanent, unforeseen inability to maintain the income level required for the plan.

Closure of Employer/Business: The unexpected and permanent closure of the debtor’s place of employment, especially if the debtor’s skills are specialized, and they cannot easily find comparable work.

For Example: Where the debtor resides could be a contributing factor towards a hardship discharge. For instance, in a large, economically diverse city like Miami, Florida (my hometown), a debtor may find it difficult to prove that the closure of one company permanently impairs their ability to earn any income. A new job may result in a different skill level or pay, but there’s still income being generated. Now compare this to a debtor residing in a small town where one major facility is the dominant employer.

If that company shuts down, the court is far more likely to find that the resulting job loss constitutes an unavoidable circumstance and that there are no other alternative sources of income.

Death of a Plan Contributor: The unexpected death of a spouse or domestic partner whose income was necessary to fund the plan or contribute to the household expenses.

Unforeseen Disasters

Events that cause a permanent or unrecoverable loss of necessary assets or create new, unavoidable financial burdens.

Non-Insured Loss: An uncompensated, uninsured loss of property due to fire, flood, or other natural disaster that requires the debtor to divert all available funds to essential living expenses.

In prior articles, I have referenced what is known as “Acts of God” or force majeure clauses that prevent contracts from being complied with. You can read more about an “Act of God” in this article.

Professor’s Note: A simple, voluntary job change, poor budgeting, or a general rise in the cost of living is usually not considered a hardship. The change must be unexpected, involuntary, and permanent in nature.

The Limitation of a Hardship Discharge

A key difference between a discharge received by completing the plan payments and a hardship discharge is the type of debts that are eliminated.

A hardship discharge is often referred to as a “Chapter 7-like” discharge. Not all debts are  dischargeable in Chapter 7 bankruptcy, including:

• Secured Debts (like a mortgage or car loan), unless the property is surrendered.
• Priority Debts (like most taxes and domestic support obligations).
• Debts that are excluded from discharge under 11 U.S.C. § 523(a) (like most student loans, debts incurred by fraud, or debts for willful and malicious injury).

For a hardship discharge, it usually occurs near the end of the plan, when payments are being made toward the unsecured portion.

For Chapter 13 debtors, the hardship discharge offers an opportunity to eliminate unsecured debt and exit bankruptcy early due to circumstances beyond their control.

Professor’s Conclusion

For Chapter 13 debtors, the hardship discharge offers an opportunity to eliminate unsecured debt and exit bankruptcy early due to circumstances beyond their control.

Colleges and universities can purchase my bankruptcy law textbook directly from Routledge Publishing. Paralegals and students who are buying single copies can do so via Amazon Books. To access my YouTube channel, click this link. You can also listen to my podcast on Spotify.

You can learn more about filing for bankruptcy and the bankruptcy petition via this link. Information on the bankruptcy court system, contact information for trustees, and your state’s exemptions can be found here. The federal bankruptcy exemptions are listed here. The latest version of the 341 Meeting of the Creditors can be found here.

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