In Chapter 13 bankruptcy, you propose a plan which repays some of your debts in full and some in part over a period of three to five years. This is called your repayment plan, and it must be approved by the court. You then make monthly payments to the Chapter 13 trustee who will in turn make payments to your creditors according to the terms of the plan. (Learn more about the Chapter 13 bankruptcy plan here.)
If you don’t make your payments to the Chapter 13 trustee on time, the court could dismiss your bankruptcy case.
So what should you do if you cannot make one or more Chapter 13 plan payments?
Immediately Inform Your Lawyer or the Bankruptcy Trustee
If you can't make a payment to your Chapter 13 plan, immediately tell your lawyer (if you have one), or the Chapter 13 trustee (if you don’t have a lawyer) that you are going to miss a payment or make a reduced payment.
If Your Situation is Temporary
If you are going to miss one payment for a good reason, the trustee may handle it informally and allow you to catch up in the following months. However, the trustee may require you to ask the court for a suspension of payments.
Request a Plan Modification
If there has been a change in your circumstances that will keep you from completing the Chapter 13 plan as originally designed, you may petition the court to modify your plan. In your petition you will need to explain your changed circumstances and specify the changes you want to make to the plan. The same tests that were applied to your original plan will be used again but the court will take into account your changed circumstances.
Reducing payments to nonpriority unsecured creditors. The most common modification is reducing the amount paid to nonpriority unsecured creditors. To do this, you will need to show under the "best efforts" test that you have less income available to make payments under the plan. If the new payment plan doesn't meet the "best interests of the creditors test" you may need to give up some nonexempt property such as a vacation home, boat, or second car. Learn more about calculating your Chapter 13 monthly payment.
Under the best interests of the creditors test, creditors must be paid a least as much as they would have received in a Chapter 7 case (which is based, in large part, on how much nonexempt equity you have). Under the best efforts test, you must pay into your plan an amount equal to thirty-six months of your disposable income if your income is below the median income for your state, and sixty months of your disposable income if your income is above the state median.
Extend the Length of the Plan
Another common way to modify a Chapter 13 plan is to extend the time period for payments under the plan. Chapter 13 plans can last to up to sixty months. An extension of the plan may be the only option if your debts consist of primarily nondischargable debts such as student loans, child support, or certain taxes.
Request a Hardship Discharge
Sometimes your circumstances may change so drastically that you are unable to complete your Chapter 13 plan, nor can you propose a modification that would comply with the law. In such a case you can ask the court for a hardship discharge. A hardship discharge will release your obligation to complete the plan and eliminate certain debts. In order to get a hardship discharge, three factors must exist.
- Your inability to complete the plan must be because of circumstances beyond your control and through no fault of your own.
- The creditors must receive as much as they would had you filed a Chapter 7 bankruptcy, which means your nonexempt property will be sold by the trustee.
- Modification of the plan is not possible.
Examples of reasons that might merit a hardship discharge include: you had a sickness or injury which kept you from working or the death of spouse resulted in a decline in income such that you couldn't make the payments on even a modified plan.
The hardship discharge is the same as a Chapter 7 discharge; only those debts dischargeable in Chapter 7 are eliminated.
Convert to Chapter 7 Bankruptcy
If you are not eligible for a hardship discharge, you may still be eligible to convert your case to Chapter 7 bankruptcy and get a discharge. If you were otherwise eligible for Chapter 7 to begin with but chose to go into Chapter 13 to try to save some assets that you would have lost in a Chapter 7, you can surrender those nonexempt assets in a conversion to chapter 7. You may also be able to convert to a Chapter 7 if your household size increases or income decreases enough to bring you below the median income for your state.
Allow Chapter 13 Case to Be Dismissed
You always have the option to have the Chapter 13 case dismissed and return to the same position that you were before you filed. This would allow your creditors to pursue their claims against you. Bur for some debtors, this may still be the right (or only) choice.