When you file for Chapter 13 bankruptcy, you enter into a repayment plan that lasts between three and five years. You use your income to make plan payments to the bankruptcy trustee, usually on a monthly basis. The amount of your payments depend on your "disposable income." The trustee then repays your creditors -- in part or in full depending on the type of debt. If you make plan payments during the entire duration of your plan period, then many of your remaining debts will be discharged (wiped out) at the end of your case (not all types of debts can be discharaged, however).
But what happens if you lose your job during the repayment period or get a new job at a lower salary or pay rate? Will you still have to make plan payments that were based on a higher income?
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 allows for bankruptcy courts to modify repayment plans when necessary and when circumstances change. If you still have enough income to make plan payments, your bankruptcy attorney can ask the court to change your plan payment amount. pThe 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.