Bankruptcy is governed by federal law, so bankruptcy is filed in federal court rather than in Michigan state courts. Federal law determines whether your case qualifies for a hardship discharge. However, even in federal court, some bankruptcy guidelines – such as exemption lists and income standards – are specific to Michigan residents.
Types of Bankruptcy
Chapter 13 bankruptcy involves debt reorganization under the terms of a three to five year repayment plan approved by the bankruptcy court. Generally, a debtor is eligible for discharge, which erases eligible debts, at the end of the repayment plan if he has fully complied with the plan’s terms. Chapter 13 is different from Chapter 7, which involves the sale of a debtor’s non-exempt assets to pay his creditors.
Under a Chapter 13 plan, the filer’s debts are prioritized and high-priority debts are paid first. Priority debts include taxes and the costs of the bankruptcy proceedings. The next class of debts to be paid is secured debts – debts secured by some type of collateral. Creditors who hold secured debts can seize the collateral if the filer does not pay. Unsecured debts, such as credit cards or loans not secured by collateral, receive the lowest priority. Generally, at the end of the Chapter 13 repayment plan, unsecured debts that are not paid in full are eligible for discharge.
Discharges completely release a debtor from certain remaining unpaid debts, but certain debt, such as student loans, cannot be discharged. A debtor must fully complete his repayment plan to receive a standard discharge, including attending financial counseling. If you do not complete your repayment plan, you cannot receive a discharge unless your circumstances make you eligible for a "hardship discharge."
If your circumstances change dramatically after the court approves your repayment plan, you can ask the court to grant you a hardship discharge. Generally, you cannot receive a hardship discharge unless your failure to complete your repayment plan is beyond your control and not your fault, your creditors have already received as much money as they would have if you had filed under Chapter 7, and modification of your repayment plan isn’t possible. For example, if you suddenly become unemployed through no fault of your own, you may qualify for a hardship discharge.