Recent Decisions Applying the Bandilli Criteria to Determine Section 1328(b)(1) Eligibility for the Chapter 13 Hardship Discharge

Recent Decisions Applying the Bandilli Criteria to Determine Section 1328(b)(1) Eligibility for the Chapter 13 Hardship Discharge

 
A Chapter 13 Debtor unable to make plan payments because of reduced income or increased expenses has three options: modifying the plan to reduce payments, conversion to Chapter 7, or the debtor may ask the court for a hardship discharge.  The statute governing bankruptcy discharge in Chapter 13, 11 USC §1328(B) sets out three clearly defined conditions for a hardship discharge: (1) the debtor's failure to complete plan payments is due to circumstances beyond the debtor's control and through no fault of the debtor; (2) creditors have received at least as much as they would have received in a chapter 7 liquidation case; and (3) modification of the plan is not possible. 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 is more limited than the discharge described above and does not apply to any debts that are nondischargeable in a chapter 7 case. 11 USC § 523.
 
Demonstrating that the client meets conditions (2) and (3) of the statute is generally straightforward.  Surprisingly, it is the failure to present the court with the documentation showing debtor has met these requirements that is the most common reason for denying a chapter 13 hardship discharge. Yet it is the first element of the statutory requirements for early hardship discharge, dealing with debtor involvement in causation, which introduces a high degree of subjectivity and is potentially the most troublesome.
 
Two recent decisions from the same South Carolina bankruptcy court, In re Barton, * US Bankr. South Carolina, 2008 Bankr. Lexis 1324, and In re Harris, US Bankr. South Carolina, 2008 Bankr. Lexis 718, discuss this first statutory requirement for a hardship discharge.  In evaluating compliance with 11 USC §1328(B)(1), the South Carolina court relied on six factors to be considered in weighing accountability; these are taken verbatim from In re Bandilli, 231 BR 836, (BAP 1st Circuit 1999).  Although this court and other courts have used Bandilli as grounds for weighing the accountability issue, the South Carolina court focused its attention more heavily than most on foreseeability in making its decision to deny early discharge.
 
The six Bandilli criteria are:
 
1.       whether the debtor has presented substantial evidence that he or she had the ability and intention to perform under the plan at the time of confirmation;
2.       whether the debtor did materially perform under the plan from the date of confirmation until the date of the intervening event or events;
3.       whether the intervening event or events were reasonably foreseeable at the time of confirmation of the Chapter 13 plan;
4.       whether the intervening event or events are expected to continue in the reasonably foreseeable future;
5.       whether the debtor had control, direct or indirect, of the intervening event or events; and
6.       whether the intervening event or events constituted a sufficient and proximate cause for the failure to make the required payments.
 
The third component of the Bandilli test may create a Catch-22 as a result of the Bankruptcy Abuse Prevention and Consumer Protection Action of 2005 forcing people with barely above median incomes into Chapter 13 plans that have no wiggle room. Unless the court permits contingency planning as a special circumstance, many of these debtors could be hung out to dry if circumstances beyond their control make continued compliance with plan payment requirements impossible.
 
There is also ambiguity concerning what constitutes the reasonably foreseeable future. In Harris, the court decided that the debtor’s involuntary unemployment could be expected to last for three months and issued a three month moratorium on collection of Chapter 13 payments to give him temporary relief. If a payment moratorium becomes a substitute for hardship discharge, plan modification, or conversion to Chapter 7 for individuals whose inability to pay is of a more long-term nature, consumer debtors may be denied a statutory benefit and unreasonably sentenced to continued servitude or left to depredation by their creditors.
 
The Bandilli criteria were most recently cited in a unique case out of the Western District of Missouri, In re Brown,Case No. 07-43738-13-jwv, 2009 Bankr. Lexis 640, March 24, 2009. In Brown, the co-debtor shot her husband and complained that the decrease in family income after his death created a hardship. Missouri has long been nicknamed the “Show Me State,” and this case was decided in a manner consistent with that designation. Since the widow Brown was unwilling to explain the circumstances of the shooting, the court found she had failed to meet her burden of proof as to her innocence regarding the causation element. A foreseeability analysis of this fact pattern may bring to bear other areas of the law.
 
* NOTE: The case links above require a subscription to lexis.com. Non-subscribers may access unenhanced versions of the cases at lexisONE.  Research packages by the day, week, or month are also available there.