Question: I have been in Chapter 13 bankruptcy for over two years. But I recently received a pay cut and can no longer afford my current Chapter 13 plan payment. Is there anything I can do to reduce my monthly payment amount?
Answer: If your income goes down during your Chapter 13 bankruptcy and you can no longer afford your monthly plan payment, you can to ask the court to modify your plan and reduce your payment amount. Whether the court will allow you to lower your plan payment will depend on a number of factors. (Learn more about Chapter 13 repayment plan.)
What Happens If Your Income Goes Down During Chapter 13 Bankruptcy?
When you file for Chapter 13 bankruptcy, you propose a plan to pay back a portion of your debts. Your income is one of the most important factors that determine the amount of your monthly Chapter 13 plan payment.
But a Chapter 13 repayment plan typically takes three to five years to complete. During the life of their Chapter 13 bankruptcies, many debtors experience fluctuations in their incomes. Luckily, if your income goes down during your bankruptcy, you may be able to ask the court to modify your plan and reduce your payment amount.
Can You Reduce Your Chapter 13 Plan Payment?
In addition to your income, how much your monthly plan payment must be depends on:
- your expenses
- the types of debts you have, and
- the amount of nonexempt property you own. (Learn more about how your nonexempt property can affect the amount of your plan payment.)
The last two factors can affect whether your payment can be reduced or not.
Types of debts. Certain debts (such as alimony, child support, and priority tax obligations) must be paid off in full through your plan (which usually can’t exceed five years in length). (Learn more about debts you must repay in Chapter 13 bankruptcy.) If most or all of your plan payment goes towards these types of debts, the court may not allow you to lower your payment unless it's willing to extend your plan length beyond the maximum allowed.
This means that in some circumstances, you may not be able to reduce your payment amount even if your income goes down. But if your plan includes any debts that are not required to be paid off in full (such as credit card debt, medical bills, or personal loans), then you may be able to lower your plan payment.
Amount of nonexempt property. In Chapter 13 bankruptcy, you must pay your unsecured creditors at least as much as they would have received in a Chapter 7. This is referred to as the best interest of creditors test. Because your unsecured creditors would have been entitled to the nonexempt value of your property in Chapter 7 bankruptcy, your plan must pay them an amount equal to what they would have hypothetically received. If you are required to pay a certain sum to unsecured creditors through your Chapter 13 plan, it can affect whether or not you can reduce your payment amount.
Example. Jane owns a car worth $25,000 free and clear. But her bankruptcy exemptions only allow her to exempt $15,000 of the car’s value. If she had filed for Chapter 7 bankruptcy instead of a Chapter 13, the trustee would have been able to sell her car and distribute the nonexempt portion of the proceeds ($10,000) among her unsecured creditors. This means that she must pay her unsecured creditors approximately $10,000 through her Chapter 13 plan. But keep in mind that certain jurisdictions may allow her to pay less because after taking into account expenses such as trustee fees and costs of sale, creditors would likely have received less than $10,000 in a Chapter 7. If Jane's proposed reduced Chapter 13 payment would mean she couldn't pay $10,000 to her unsecured creditors, the court won't reduce her plan payment.
How to Modify Your Chapter 13 Plan
If you want to reduce your payment amount after the court has already confirmed (approved) your Chapter 13 plan, you typically must file a motion to modify your plan with the court and serve it on the bankruptcy trustee and all of your creditors. (Learn more about how to modify your Chapter 13 repayment plan.)
In most cases, to file a motion to modify, you will need to obtain a hearing date, provide a written declaration as to why your plan payment should be reduced, and propose an amended Chapter 13 plan to the court. The trustee and your creditors will have a chance to review your proposed plan and object to it if they wish. If the trustee or a creditor objects to your proposed plan, each party will have an opportunity to explain his or her position to the judge at the hearing.
What If You Can’t Lower Your Chapter 13 Plan Payment?
Depending on the facts of your case, if you can’t modify your plan to reduce your payment amount, you may be able to:
- ask the court to temporarily suspend your payment obligations
- request a hardship discharge
- convert your case to a Chapter 7, or
- dismiss your Chapter 13 bankruptcy and refile at a later time.