BASIC DISCHARGE
When the debtor completes a Chapter 13 case, the discharge eliminates all of the remaining balances owed on all general unsecured debts (those debts without priority) that were provided for in the Plan.
Those unsecured debts will by then already have received payment based on what the debtor could reasonably afford. One limitation that affects a Chapter 13 Plan is that it must pay those unsecured debts at least as much as the creditors would have received if the debtors non exempt assets had instead been liquidated under chapter 7. Sometimes this will be payment in full; sometimes it will be a percentage of the claims; sometimes it may even be nothing (under the appropriate circumstances).
DISTINCTIONS IN DISCHARGE BETWEEN CHAPTER 7 AND CHAPTER 13
The new bankruptcy law in 2005 brought changes to the area of a Chapter 13 discharge. Previously, the Chapter 13 discharge was much broader than the Chapter 7 discharge. The discharge of debts provided for under Chapter 13 is still broader than the discharge under chapter 7, but the new bankruptcy law in 2005 has narrowed the differences considerably.
With minor exceptions, debts that are nondischargeable under Chapter 7 have now been made nondischargeable under Chapter 13. The main exceptions to this are that Chapter 13 will discharge debts (other than debts in the nature of support) that arise from a divorce or separation agreement. It will also discharge debts that arise from a willful or malicious injury caused by the debtor (unless there has already been restitution or damages awarded in a civil action against the debtor).
THE HARDSHIP DISCHARGE
After confirmation of a plan, circumstances may arise that prevent the debtor from completing the plan. In such situations, the debtor may ask the court to grant a “hardship discharge.” Bankruptcy Code, Section 1328(b).
Generally, such a discharge is available only if:
- The debtor’s failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor; and
- Creditors have received at least as much as they would have received in a chapter 7 liquidation case; and
- Modification of the plan is not possible.
Injury or illness that precludes employment sufficient to fund even a modified plan may serve as the basis for a hardship discharge. The hardship discharge is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a Chapter 7 case. See Bankruptcy Code Section 523.
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