§ 160.3 — Circumstances for Which the Debtor Should Not Justly Be Held Accountable
Revised: June 17, 2004
The discharge before completion of payments is often called a “hardship” discharge because the debtor’s failure to complete payments under the plan must be due to circumstances “for which the debtor should not justly be held accountable.”1 “Justly” in § 1328(b) is a fact-bound concept that won’t easily reduce to rules useful in the next case; bankruptcy courts have broad discretion to define and apply this condition on a case-by-case basis. The reported decisions have wisely avoided attempting black-letter definitions of circumstances that fit the requirement.
Every Chapter 13 debtor experiences difficulties during the years of payments under the plan. If the “not justly . . . accountable” standard means anything, then bankruptcy courts must reserve hardship discharge for circumstances exceeding the normal or ordinary range of mishaps that befall Chapter 13 debtors. It has been said that the justly accountable standard for hardship discharge in § 1328(b) does not require proof of “catastrophic” circumstances; rather, the bankruptcy court must exercise “special vigilance.”2
When the circumstances preventing the debtor from completing payments are economic, one court stated the justly accountable standard as follows:
Where a debtor is unable to complete payments under a Chapter 13 plan due to economic circumstances that did not exist nor were foreseeable at the time of confirmation of the plan, where those circumstances are beyond the debtor’s control, and where the debtor has made every effort to overcome those circumstances but is unable to complete his plan payments, then I think the requirement of § 1328(b)(1) has been met.3
At a hardship discharge hearing, the debtor has the burden to prove the maximum misery possible. The cases require something more than just the temporary loss of a job or temporary physical disability.4 Circumstances indicative of true hardship are permanent in nature, are not caused by misconduct by the debtor and arise after the filing of the case, if not after confirmation of the plan. Proximity to confirmation is suspect: the longer the debtor has performed under the plan, the more likely the court will look favorably upon a claim of hardship.5 Permanent physical disabilities that arise after confirmation are highly relevant. But even a permanent serious medical condition will not justify a hardship discharge if the condition existed at the filing of the Chapter 13 case and the changed circumstances propelling the motion are not related to that preexisting medical condition.6
Changes in financial condition less than collapse are material for modification after confirmation but support a hardship discharge only if the debtor is unable to fund a modified plan.7 Seeking a hardship discharge late in a Chapter 13 plan when modification is not practicable can work against the debtor if an earlier effort at modification could have saved the plan.8
The death or incompetency of the debtor after confirmation may be grounds for a hardship discharge. Under appropriate circumstances, Bankruptcy Rule 1016 contemplates the completion of administration of a Chapter 13 case after the death or incompetency of the debtor.9 It has been held that death is a circumstance for which the debtor cannot justly be held accountable.10 It has been recognized that a hardship discharge at the death of a Chapter 13 debtor may have substantial benefits for a surviving spouse or children.11
Medical evidence may be necessary at a contested hearing under § 1328(b). Hardship applications sometimes involve disabling conditions such as alcoholism, drug abuse or incarceration. These can be difficult trials. Bankruptcy courts are receptive to evidence of physical and mental impairments but are understandably reluctant to find the debtor is not justly accountable when the condition causing hardship results from the debtor’s own actions.
In a joint husband-and-wife case in which one spouse is disabled after confirmation, if funding of the plan was dependent upon the now disabled spouse, both debtors may be entitled to a hardship discharge. If one of the spouses is disabled for a reason that would fail the not justly accountable test—for example, if one spouse is incarcerated for criminal misconduct—the other spouse may be innocent of misconduct and eligible for a hardship discharge. When one debtor dies after confirmation, the surviving spouse might satisfy § 1328(b)(1) even if the death was, for example, a suicide.
Avoiding accountability for misconduct by a spouse in a joint case may require the “innocent” spouse to act during the Chapter 13 case to create distance from the wrongdoer. For example, in Roberts v. Boyajian (In re Roberts),12 one spouse in a joint Chapter 13 case sought a hardship discharge when the other spouse had accumulated more than $53,000 of unpaid postpetition taxes. Although no order for consolidated administration was entered by the bankruptcy court,13 the U.S. Court of Appeals for the First Circuit affirmed the bankruptcy court’s refusal of a hardship discharge based on knowledge of the accruing taxes and failure to create distance:
[T]he bankruptcy court plainly did not abuse its discretion by denying the request for a hardship discharge . . . particularly in light of (i) Sharon Roberts’ election to proceed, with her husband, under a joint chapter 13 petition and plan, and (ii) her full awareness of the rapidly accruing postpetition IRS tax obligations, combined with her subsequent failure to move for severance.14
1 11 U.S.C. § 1328(b).
2 In re Bandilli, 231 B.R. 836, 839–41 (B.A.P. 1st Cir. 1999) (Although the “justly . . . accountable” standard for hardship discharge in § 1328(b) does not require proof of catastrophic changed circumstances, debtors failed to justify hardship discharge three and one-half months after confirmation. “Although there is no express requirement in 11 U.S.C. § 1328(b) that the debtor prove the existence of catastrophic circumstances, most bankruptcy courts that have addressed the issue have allowed a hardship discharge only when a debtor has suffered from catastrophic circumstances that directly cause the debtor to be unable to complete plan payments. . . . We are unwilling to read the word catastrophic into the statute. . . . The word ‘accountable’ is comparatively mild to the emotionally-laden term ‘catastrophic.’ . . . [W]e are mindful that a request for discharge under § 1328(b) merits special vigilance. . . . The Debtors offered little or no evidence of decreased income and no credible evidence of any correlation between the alleged decrease in income and Mrs. Bandilli’s ongoing medical condition.”). Accord In re Edwards, 207 B.R. 728, 730–31 (Bankr. N.D. Fla. 1997) (Circumstances for which debtor is not justly accountable under § 1328(b)(1) need not be “catastrophic”; that the debtor’s business failed 30 months into plan is sufficient. “I am unable to conclude that the law requires a debtor seeking a hardship discharge under § 1328(b) must demonstrate the existence of catastrophic circumstances . . . . I do not believe that the language of § 1328(b)(1) requires such a standard. . . . [G]iven the requirement of § 1328(b)(2) that unsecured creditors have received at least that which they would have received in a liquidation under Chapter 7, and the limited extent of a discharge received under § 1328(b), I can find no justification for exacting such a standard.”). But see In re Cummins, 266 B.R. 852, 855 (Bankr. N.D. Iowa 2001) (“[B]ankruptcy courts have typically limited [hardship discharge] . . . to catastrophic circumstances. . . . [H]ardship discharges are rarely granted other than the case of a debtor’s death.”).
3 In re Edwards, 207 B.R. 728, 730 (Bankr. N.D. Fla. 1997).
4 See In re Cummins, 266 B.R. 852, 856–57 (Bankr. N.D. Iowa 2001) (That injuries temporarily interrupted debtor’s carpentry work and codebtor decided to stay home and take care of young children are not sufficient circumstances to support hardship discharge. “[T]he circumstances upon which they rely to seek a hardship discharge do not measure up to the catastrophic circumstances necessary to warrant satisfaction of the first criteria of § 1328(b). While it is true that Mr. Cummins was injured in two separate incidents, he is presently capable of employment and has been medically cleared to return to employment at this time. . . . [A] substantial component of the parties’ inability to complete this plan is the fact that Mrs. Cummins is no longer employed . . . but has elected to remain at home with the parties’ young children because of daycare expense. While these circumstances pose a financial hardship, they are the type of economic reason which does not support a hardship discharge. . . . [A] hardship discharge under Chapter 13 is reserved for extraordinary circumstances which are described as catastrophic.”); In re Easley, 240 B.R. 563, 565 (Bankr. W.D. Mo. 1999) (Debtors not entitled to hardship discharge because temporary loss of a job is not sufficient. “[A] request for a hardship discharge is to be treated with some gravity . . . the loss of employment alone is insufficient. That is especially so where, as here, the debtor is healthy and is actively seeking employment. The Easleys made payments under their confirmed plan for less than one year. Mr. Easley testified that he is seeking employment. Ms. Easley is not employed, but she offered no evidence to suggest she is unable to work. I find that under these facts debtors have failed to prove that their failure to complete the plan payments are due to circumstances for which they should not be held accountable.”); In re Nelson, 135 B.R. 304, 307 (Bankr. N.D. Ill. 1991) (“Most courts faced with a request for a hardship discharge have required the presence of catastrophic circumstances. . . . [I]nability to find full time employment and an unexpected expense of $1,118.00 . . . are not the type of catastrophic events such as death or disability which prevent a debtor, through no fault of his or her own, from completing payments pursuant to a plan of reorganization.”); In re White, 126 B.R. 542, 546 (Bankr. N.D. Ill. 1991) (Court denied hardship discharge when debtor’s reduced income resulted from cessation of temporary disability payments, not from some catastrophic circumstance affecting both debtors. One debtor was temporarily partially disabled approximately five years before seeking a hardship discharge. Social security disability benefits lasted approximately one year and debtor then returned to work. Disability insurance coverage with respect to one creditor was discontinued four years before seeking a hardship discharge. “[The debtor’s] hardship is far less than permanent or totally disabling. The nature, extent, and degree of severity of [the debtor’s] chronic low back pain are not of such permanence and hardship [as] to constitute the proper characterization as catastrophic.”).
5 See, e.g., In re Easley, 240 B.R. 563 (Bankr. W.D. Mo. 1999) (Temporary loss of a job is not sufficient for hardship discharge purposes in a case where debtors made payments under confirmed plan for less than one year.); In re Bandilli, 218 B.R. 273 (Bankr. D.R.I. 1998) (Hardship discharge denied three and one-half months after confirmation. Serious medical condition was permanent and antedated filing.), aff’d, 231 B.R. 836 (B.A.P. 1st Cir. 1999); In re Edwards, 207 B.R. 728 (Bankr. N.D. Fla. 1997) (Circumstances for which debtor is not justly accountable included that the debtor’s business failed 30 months into the plan, debtor searched extensively for new employment, and after finding a new job, debtor had insufficient income to fund a Chapter 13 plan.); In re Marrero, 7 B.R. 589 (Bankr. D.P.R. 1980) (Debtor who had not started payments under a plan did not qualify for hardship discharge.).
6 See In re Bandilli, 218 B.R. 273, 274–75 (Bankr. D.R.I. 1998) (Hardship discharge denied three and one-half months after confirmation. Serious medical condition was permanent and antedated filing. There was “inconsistent and generally unreliable testimony” as to the debtor’s income. Debtor neglected to schedule or mention Chapter 7 discharge of $340,000 three years earlier. No evidence that plan modification was impractical. Hardship discharge denied under “truly worst of the awfuls” or more relaxed standard of “‘due to economic circumstances that did not exist nor were foreseeable at the time of confirmation of the plan, where those circumstances are beyond the debtor’s control, and where the debtor had made every effort to overcome those circumstances but is unable to complete his plan payments.’”), aff’d, 231 B.R. 836, 841 (B.A.P. 1st Cir. 1999) (“The Debtors offered little or no evidence of decreased income and no credible evidence of any correlation between the alleged decrease in income and Mrs. Bandilli’s ongoing medical condition.”).
7 See § 353.3 [ Modification Is Not Practicable ] § 160.5 Modification Is Not Practicable.
8 See In re Nelson, 135 B.R. 304, 307 (Bankr. N.D. Ill. 1991) (The events that the debtors claim prevent them from completing payments occurred in 1987 and 1988; the debtors’ motion for a hardship discharge was filed in April of 1991. The earlier events “should have been brought to this Court’s attention at that time and modification of the Plan considered.”).
9 See §§ 7.8 [ Eligibility of a Decedent’s Estate ] § 10.8 Eligibility of a Decedent’s Estate, 7.9 [ Eligibility of an Incompetent and Petitions on Behalf of Others ] § 10.9 Petitions on Behalf of Others: Incompetents, Next Friends, Powers of Attorney and the Like and 269.1 [ Death or Incompetency of Debtor ] § 128.1 Death or Incompetency of Debtor.
10 In re Graham, 63 B.R. 95 (Bankr. E.D. Pa. 1986); In re Bond, 36 B.R. 49 (Bankr. E.D.N.C. 1984). See In re McNealy, 31 B.R. 932 (Bankr. S.D. Ohio 1983).
11 In re Bond, 36 B.R. 49 (Bankr. E.D.N.C. 1984) (Administration of estate under North Carolina probate law would result in deceased debtor’s minor children’s receiving nothing.).
12 279 F.3d 91 (1st Cir. 2002).
13 See § 7.1 [ Debtor Must Be an Individual ] § 10.1 Debtor Must Be an Individual; Spouses Allowed for discussion of consolidation of husband-wife Chapter 13 cases.
14 279 F.3d at 93–94.