When you enter into a bankruptcy filing under chapter 13 of the bankruptcy code, you must successfully complete a three to five year repayment plan that you can submit at the time of filing. The discharge of remaining debts and the successful conclusion of your bankruptcy case depends on you making the required payments for the entire duration of the bankruptcy repayment period. Such payments are made to the trustee, usually every month, and are then paid out to appropriate creditors.
One problem, however, is that three to five years is a long period of time. Anything could happen over that time, including the loss of a job. When a job loss or other change in circumstances occurs, many people wonder what will happen and whether they will have to keep making the payments that were based on their higher disposable income while employed.
What if You Lose Your Job During the Repayment Plan?
If you are in the middle of a chapter 13 repayment plan and you lose your job, all is not lost. Chapter 13 is designed to give you the opportunity to repay your debts based on the disposable income (i.e. income left over after paying your expenses) that you have available to you. Your payments are based both on the kind of debt you have (with mortgages and other secured debts requiring full payment) as well as on how much disposable income you actually have to put towards debt, both secured and unsecured.
Life experience tells us that disposable incomes can and do change. The bankruptcy system understands that and has created flexibility in the law that that allows for bankruptcy courts to modify repayment plans when necessary and when circumstances change. Your bankruptcy attorney can simply petition the court for you after a job loss or reduction in available income and can prove to the court why a change needs to be made. The petition submitted by your bankruptcy attorney will include a new plan based on your new income, offering lower monthly payments and simply repaying less of the debt.
Unsecured Creditors Paid Less Than Secured Creditors
While the same general rules will be in place regarding full payment of secured debts (as well as full payment of certain other debts such as child support payments), the low-priority unsecured creditors will simply receive less money under the new repayment structure than they would have had the job loss not occurred. This means a larger portion of the debt will end up being discharged at the end of the chapter 13 repayment plan term. (To learn more about the details, check out our section on the Chapter 13 Repayment Plan.)
In some situations, you may be able to get the remaining debts discharged, similar to what happens in Chapter 7 bankruptcy. To learn more about that, see our article on The Chapter 13 Hardship Discharge.