Chapter 12 Bankruptcy Part IV: The Discharge
Welcome back and Happy New Year! After a short break it is nice to be back at the keyboard. This is the fourth and final installment in the Chapter 12 Tutorial: the discharge.
After completing all payments under the chapter 12 plan, the debtor will receive a discharge as long as the debtor certifies that all domestic support obligations, if any, have been paid. What is a discharge? The discharge is the whole point. The discharge has the effect of freeing the debtor, with limited exceptions, from all debts provided for by the plan, allowed under section 503, or disallowed under section 502. Your creditors who were provided for under the plan, whether in full or in part, may no longer seek repayment from you regarding the discharged debts. The slate is wiped clean.
Certain categories of debts are not discharged in chapter 12 proceedings. 11 U.S.C. § 1228(a). Those categories include:
- 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.
The bankruptcy law regarding the scope of a chapter 12 discharge is complex, however, and debtors should consult competent legal counsel in this regard prior to filing. Those debts which will not be discharged should be paid in full under a plan. With respect to secured obligations, those debts may be paid beyond the end of the plan payment period under a separate agreement and, accordingly, are not discharged.
But what if you cannot make your plan payments, can you still get a discharge? The court may grant a “hardship discharge” to a chapter 12 debtor even though the debtor has failed to complete plan payments. 11 U.S.C. § 1228(b). Generally, a hardship discharge is available only to a debtor whose failure to complete plan payments is due to circumstances beyond the debtor’s control and through no fault of the debtor. Creditors must have received at least as much as they would have received in a chapter 7 liquidation case, and the debtor must be unable to modify the plan. For example, 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 does not apply to any debts that are nondischargeable in a chapter 7 case, 11 U.S.C. § 523.
