A Real Gem

A hardship discharge is available to debtors who are not current on their post petition support payments, even though such a delinquency would prevent a regular discharge.

I gathered this hitherto unknown bit from Henry Sommer in the panel on Marital Issues in Bankruptcy Saturday at the NACBA convention.

BAPCPA added to the prerequisites for a discharge a provision that the debtor must be current on post petition support payments. § 1328(a). Thanks to the prevailing economic conditions,  I’ve had far more occasions to seek a hardship for clients in the past two years than in all my prior practice.

Part of the appeal of a hardship discharge now comes from BAPCPA’s elimination of Chapter 20. When it was possible to get a discharge in a Chapter 13 immediately following a Chapter 7, conversion often seemed equally beneficial to the client.  Since 2005, I think harder about the choice.  By electing a hardship discharge, my client can file another 13 two years from the commencement of the case that is cratering.

This becomes especially important when the Chapter 13 filing was driven by non dischargeable taxes. The taxes will survive the hardship discharge, but by getting the hardship discharge, the debtor can file another Chapter 13 when their situation improves and avail themselves of the automatic stay.

Not having to worry about post petition support delinquencies makes the process just that much easier.  ‘Bout time something got easier.

Image courtesy of Wikipedia.

Have to say I’d done neither until Judge Christopher Klein mentioned it at a bankruptcy seminar earlier this year.  He told the group that he had learned about it from a pro per who cited it to him in a dispute in a Chapter 7.  So what’s this obscure rule?

Subsection(c)(2) allows the debtor to move to delay entry of the discharge in his case. The result is that the court continues to have jurisdiction and the bankruptcy case does not get closed out from under an action pending in the case.

Judge Klein’s pro per used it to maintain jurisdiction over a mortgage servicing dispute.  I could have used it when I was seeking attorneys fees for a relief from stay motion brought and prosecuted for months by a party without standing.  I found myself in court being told that the judge would not rule on my request since the clerk had closed the case and he was without jurisdiction.

I have subsequently made use of 4004 to prevent entry of the discharge while we scurried to get reaffirmation agreements on file.  The cases are pretty consistent that the agreement needs to be filed before entry of discharge and that you cannot reopen the case or set aside the discharge to file such an agreement.  So, if you want to reaffirm, and time is tight, consider a motion under 4004 to delay the entry of discharge.

When you count back for the three year rule (the date on which the return was last due without penalty is more than three years prior to the date the bankruptcy is filed), remember that in 2007, tax returns were due on the 16th of April.

In 2007, April 15th was a Sunday, so returns were due the following day.  File your client’s case on April 16, 2010, and those taxes will not be sufficiently aged to be discharged.

My list of things never to take the client’s word for is headed by TAXES.  Get a transcript, know whether the client got an extension, then go to the calendar for the relevant year, and make sure you know when returns were due in that year.

More on taxes and the means test

When bankruptcy only part of answer to tax problem

Image courtesy of saturnism