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:
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.
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:
We discuss each of these options below.
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:
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.
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.
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.
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.
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.
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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.