Generally, a Chapter 12 debtor should receive a discharge after completing all payments under the chapter 12 plan as long as the debtor certifies that all domestic support obligations, if any that came due before making such certification have been paid. However, the court may grant a “hardship discharge” to a chapter 12 debtor even though the debtor has failed to complete plan payments. Hardship Discharge excuses a family farmer from completing payments under a plan of reorganization.
Usually, a hardship discharge is available only to a debtor whose failure to complete plan payments is due to circumstances for which the debtor “should not justly be held accountable.” This means that the circumstances should be beyond the debtor’s control and through no fault of the debtor. A condition of injury or illness of a debtor that precludes employment adequate to fund even a modified plan may serve as the basis for a hardship discharge.
The bankruptcy court may grant the debtor a discharge of all unsecured debts provided for in the plan or disallowed by the court. However, creditors must have received at least as much as they would have received in chapter 7 liquidation cases. Moreover, the debtor must also be unable to modify the plan. If the trouble in making payments is just temporary and extending a Plan term or lowering payments would fix it, a debtor cannot get a hardship discharge.
Additionally, the hardship discharge does not apply to any debts that are nondischargeable in a chapter 7 case. A few categories of debts that are not discharged in chapter 12 proceedings are among others;
- Debts for alimony and child support;
- Money obtained through filing false financial statements;
- Debts for willful and malicious injury to person or property;
- Debts for death or personal injury caused by the debtor’s operation of a motor vehicle while the debtor was intoxicated; and
- Debts from fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny.
A hardship discharge might be granted only after a hearing before the Court. A hardship discharge can be a good way out of a bad situation in some cases.