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:
If you haven't filed yet, you might want to learn how bankruptcy works and other things you should know about bankruptcy, or check for common issues using our "Do I need a lawyer?" bankruptcy quiz.
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 checked that each creditor would get the amount they were entitled to receive. 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're paying 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 find that 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 have a right to 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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