When Virginia residents find themselves in significant debt, bankruptcy is often a consideration. Depending on the debtor’s circumstances, either Chapter 7 or Chapter 13 bankruptcy may be selected. In Chapter 7, the debtor’s non-exempt assets are liquidated, creditors are paid out of the proceeds, and much of the remaining unsecured debt is discharged. In Chapter 13, the debtor makes payments under a long-term court-approved plan, with most of the balance being discharged at completion.
Many debtors who have a reliable source of income choose the Chapter 13 option because it allows them to keep their property, such as real estate, automobiles and other valuables, while restructuring their long-term obligations. However, there sometimes are situations that might prevent the debtor from completing the repayment plan. In such cases, the bankruptcy court may entertain the possibility of allowing the debtor to receive a hardship discharge.
When granting a hardship discharge, the courts typically consider whether the debtor’s situation conforms to three “prongs” stipulated by Bankruptcy Code Section 1328(b). The first is whether the debtor has experienced a catastrophic incident. An example is becoming disabled due to an illness or accident such that they are no longer able to earn a living. The second is whether conversion of the bankruptcy to a Chapter 7 would benefit the creditors, and the third is whether the debtor can afford plan payments given the income that he or she currently has.
Individuals who are considering filing for Chapter 13 and who are concerned about being able to meet payments may benefit from speaking with an experienced attorney. While there are many benefits of this form of bankruptcy, it is important that the terms of the plan be strictly adhered to.