Restructuring

Contributed by Alana Katz.
Trying to discharge your personal debts?  Well, here is a new method: in In re Hoover, the Bankruptcy Court for the Northern District of California ruled that a debtor’s death, under appropriate circumstances, is grounds for the debtor to discharge remaining debts owed to unsecured creditors, even though the debtor has not completed the payments under his chapter 13 plan. 
Background
The chapter 13 debtor, Thomas Wayne Hoover, Sr., died with only one payment remaining on his five-year plan.  At the time of his death, he was living on disability and a small pension, which was not sufficient to make the final payment.  Therefore, the debtor’s attorney requested that the court grant the debtor a “hardship discharge” under section 1328(b) of the Bankruptcy Code, which provides a hardship discharge if a debtor is unable to complete payments under a chapter 13 plan due to circumstances out of the debtor’s control.
The Bankruptcy Code does not specifically address the consequences of a debtor’s death on the administration of the case and the effect on an uncompleted chapter 13 plan.  Here, however, the bankruptcy court looked to the Bankruptcy Rules for a possible solution.
Analysis
Bankruptcy Rule 1016 states that after the death of a chapter 13 debtor, the case may be dismissed if further administration of the case is not possible.  This rule, read in conjunction with section 1328(b), has been interpreted differently by various courts.  Although some find that death is a circumstance for which a debtor should not be held accountable, others have taken a more rigid approach.  For example, at least one court has held that because rule 1016 does not specifically mention a hardship discharge, granting one in favor of a deceased debtor is impermissible.
The Hoover court drew a direct contrast between the debtor’s circumstances and the court’s previous ruling in In re Hennessey.  In Hennessey, the debtor passed away slightly over a year after confirming her chapter 13 plan, prior to any payments to unsecured creditors.  The court in that case held that a hardship discharge would be unfair to unsecured creditors awaiting payment by precluding them from making claims in the debtor’s probate proceeding, leading to “inappropriate consequences” outside of bankruptcy.
Conversely, at the time of the debtor’s death in Hoover, secured and priority claims had been paid in full and unsecured creditors had received all but the final payment under the chapter 13 plan.  Additionally, the court did not have a sense that there would be a probate proceeding through which the unpaid unsecured claims might have recourse, avoiding the consequences contemplated by the Hennessey court.  Therefore, the court held that the equities in the case allowed for a hardship discharge and that modification of the debtor’s plan was not practicable given the timing of the debtor’s death.
Conclusion
The Hoover court determined that the debtor’s death, in the circumstances of that case, qualified his estate for a hardship discharge.  The facts in Hoover were very different than in Hennessey, where at the time of the debtor’s death a large amount of payments remained owed to unsecured creditors.  Unlike the certainties of death and taxes, whether death entitles a chapter 13 debtor to a hardship discharge depends on the facts and circumstances.