Chapter 13 bankruptcy cases in New York are usually filed so you can get caught up on your past due mortgage or car loan payments. But one benefit of Chapter 13 is that your unsecured debts – credit cards, personal loans and so on – are discharged at the end of the case. It’s true that some debts are discharged in Chapter 13 but not in Chapter 7, which is another reason why you may decide to go this route.
But what happens if you are in the middle of a Chapter 13 Plan and your financial situation changes dramatically … for the worse?
Not many New York bankruptcy cases end this way, but there is a chance you may want to look into a hardship discharge. In the past few years many bankruptcy judges in New York courts have begun to look at the hardship discharge as a reliable alternative to dismissing the case or converting it to Chapter 7.
The Rules Of The Game
Under Section 1328(b) of the U.S. Bankruptcy Code, if through circumstances outside of your control, can’t modify your plan then you may be able to ask the court to issue a hardship discharge.
There’s a catch, though. Your creditors must have already received as much as they would have if you’d originally filed a Chapter 7. If you would have had a “no asset” case then this is simple, but if you filed Chapter 13 because you had non-exempt assets then your lawyer is going to need to break out the calculator before doing a motion for a hardship discharge.
Remember – A Hardship Discharge Is Not All It’s Cracked Up To Be
Keep in mind, though, that a hardship discharge will not erase certain types of debt, such as student loans and child support. Some types of federal, state, and local taxes will also be unaffected by a hardship discharge.
The Bottom Line When It Comes To This Tactic
If your back is up against the ball, this may be something you want to consider. If your creditors have gotten as much as they would have received in Chapter 7 and all a conversion would do is waste time and money (time on an additional meeting of creditors, money for legal fees on a converted case) then perhaps it will work for you.
You definitely want to talk with your lawyer about this, and plan accordingly. New York bankruptcy judges historically didn’t like handling hardships in this fashion, and it’s only in the last few years that anyone’s ears have opened to the prospect.
Photo of the Brooklyn Bridge at night by Johannes Pape.
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