What If I Lose My Job After I File for Chapter 13 Bankruptcy?

Life circumstances can change during a Chapter 13 plan, and it isn't uncommon for a filer's income to drop. Fortunately, the bankruptcy system is flexible enough to accommodate unexpected events. But lowering or "modifying" a monthly plan payment after an income loss isn’t easy.

We explain how to determine whether you’re eligible for a modification, as well as other options, including:

• asking for an early Chapter 13 discharge
• switching or "converting" to Chapter 7, or
• dismissing your bankruptcy case.

Once you've learned about your options if you lose your job during Chapter 13 bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.

What Happens If My Income Decreases or I Lose My Job During Chapter 13?

You have options. If you need a short period to catch up on payments, the Chapter 13 trustee responsible for your case might work with you. But be sure to follow the trustee’s instructions. Interest and fees build over time, and if they go unpaid, it might be impossible to catch up and complete your plan.

If a temporary reprieve isn’t enough, you might be able to do the following:

• lower your Chapter 13 payment permanently
• ask for a Chapter 13 “hardship” discharge
• switch or “convert” your case to Chapter 7, or
• dismiss your Chapter 13 case entirely.

We discuss each of these options below.

Can I Lower My Chapter 13 Payment Permanently After a Job Loss?

Yes, sometimes you can reduce Chapter 13 payments after a job loss, but lowering your Chapter 13 payment can be tricky. The bankruptcy judge can’t deviate from the rules determining how much you must pay secured, priority, and unsecured debts.

Remember when you first proposed your Chapter 13 plan? Your attorney helped you develop a plan that followed the rules, and the judge ensured each creditor would receive the proper amount. Here's when a judge can adjust your monthly payment:

• you return a house, car, or other secured property to the lender and stop paying the monthly property payment and full arrearage amount
• you sell an RV, boat, or other property you couldn’t protect with an exemption, pay the sales proceeds to the trustee and eliminate that portion you're paying to keep nonexempt property, or
• reduce the amount paid to credit card balances, medical bills, student and personal loans, and other nonpriority, unsecured debts that aren't guaranteed with collateral property.

The problem with the first two options? You probably filed for Chapter 13 to keep your home, car, or other nonexempt property you’d have lost in Chapter 7, and it’s unlikely that you’ll want to part with it now.

The problem with the last option? Even if you reduce how much you pay toward credit card balances, medical bills, and other nonpriority, unsecured debts to zero, your plan payment probably won’t change much. Most filers don’t pay a lot toward this category of bills.

Check whether you can modify your plan. Even if it’s unlikely that you'll be able to lower your payment enough to stay in Chapter 13, it’s worth checking. Find your plan and review it while reading how to calculate your Chapter 13 plan payment. The article will help clarify what you can and can’t eliminate. If you can lower your payment enough to fit your current budget, your bankruptcy attorney can file a Chapter 13 modification motion.

Request a Chapter 13 Hardship Discharge After a Decrease in Income

You can ask for an early discharge based on a job loss or another financial hardship, but courts rarely grant them. You must have already paid your “unsecured creditors” or those holding debt for credit cards, medical bills, student loans, and other unsecured debts the amount they would have received had you filed for Chapter 7.

Meeting this criterion is challenging because most plans don't pay unsecured creditors until the end. But it is possible.

Convert Your Chapter 13 Case to Chapter 7 Bankruptcy

One of the benefits of converting from Chapter 13 to Chapter 7 bankruptcy is that you’ll wipe out qualifying debts quickly. The downside? You could lose property. Also, qualification rules vary by jurisdiction, so you'll want to talk to your lawyer about the procedures.

Dismiss Your Chapter 13 Bankruptcy

Unlike Chapter 7, you can dismiss a Chapter 13 case if it isn’t working for you or you can’t make your payment. Or you can stop making payments and wait for the court to dismiss your case.

Either way, you’ll receive credit for amounts paid, but your creditors can add any stayed interest to the outstanding balance owed.

Navigating Your Bankruptcy Case

Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.

Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.