Income Disruption in an Ongoing Pandemic: Plan Modification, or Hardship Discharge?

One year into the economic crisis caused by the COVID-19 pandemic, unemployment rates have already surpassed the high levels seen during the Great Recession in 2009. [1] Like everyone in this country and around the world, debtors are struggling.

Section 1329 of the Bankruptcy Code allows for post-confirmation plan modifications. For most debtors, the proposed modification need merely conform with one of the modification provisions of § 1329(a), subject to the discretion of the judge, to be approved. [2] Additionally, Congress amended § 1329 with the CARES Act, allowing for debtors whose plans had already been confirmed by the date of the enactment of the CARES Act to extend their plan terms to a maximum of 84 months if the debtor “is experiencing or has experienced a material financial hardship due, directly or indirectly, to the coronavirus….”

The flexibility of this provision should not be underestimated. Note that the debtor needn’t ask for the modification at the time the hardship occurs; she can ask for it if the hardship already happened and she has recovered, or she was managing to make ends meet for some time, but requires more robust relief over time. Additionally, “directly or indirectly” provides a lot of leeway for debtors. Perhaps a debtor needed to take care of family members who were sick with the virus, care for children who were home from school due to the pandemic; this would be considered an indirect financial hardship justifying the longer term under the CARES Act.

Importantly, the debtor need not be current at the time of the request for a longer plan term, nor need the pandemic-caused hardship be the sole reason the debtor requests the modification. Two recent unpublished opinions, one out of Louisiana and one from Alabama, make this clear. [3] In both cases, the debtors had large delinquencies prior to March 2020, but also experienced income disruptions due to the pandemic. The attorneys successfully used the longer plan term to both cure the post- and pre-pandemic arrearages. The courts found this to be a proper use of § 1329(d), noting that “nothing in the text of the CARES Act forecloses the relief available under section 1329(d) to those Debtors simply because they were behind in plan payments prior to March 27, 2020.” [4] This suggests it might be worthwhile for consumer practitioners to review their cases for those that are experiencing delinquencies, and try to take advantage of the flexibility and breadth of § 1329(d) prior to the sunset of the 84-month extension option.

It remains to be seen whether case law interpreting § 1328(b)’s hardship discharge requirements will be altered by debtors affected by the pandemic. Section 1328(b) allows a court to grant a debtor a discharge despite failing to complete plan payments, provided that (1) the failure is due to circumstances for which debtor should not be justly held accountable; (2) unsecured creditors have received what they would have in a chapter 7 proceeding; and (3) modification is not practicable. To date, there have been no opinions issued regarding a debtor’s financial difficulty due to the pandemic resulting in a hardship discharge. The barriers to this route are clear: Courts have generally agreed that unemployment alone is insufficient to justify a hardship discharge; the debtor should instead request a suspension in plan payments until he finds a new job. [5] Additionally, the option to seek an extension under § 1329(d) clearly hamstrings debtors requesting a hardship discharge; this is where most plan modifications that would not have been practicable now are.

That being the case, and more than a year into the pandemic, it remains to be seen how the legacy of the CARES Act modification extension to § 1329, and the hardship discharge under § 1328, will continue to co-exist in case law. Should a debtor who, for example, only has work experience in the service industry, whose employer closed, who has been unable for the past year to obtain steady employment, be required to stay in a chapter 13 plan, making nominal payments for a seven-year term, committing exempt unemployment benefits and stimulus checks to her creditors? That scenario, as well as others, looms in front of debtors. It might be time to start taking it to the courts.