If your income drops during Chapter 13, you can ask the trustee to defer it briefly, or, in some cases, the court can modify your plan and lower your payment.
Yes, you can ask the court to modify your Chapter 13 plan and lower your payment if your income drops, but the court will generally approve it only if you can still pay priority debts, arrears, and the value of your nonexempt property. A job loss, pay cut, illness, or increase in expenses can all be reasons to ask for a change. But because your income is a critical part of calculating your Chapter 13 plan payment, a modification isn’t always possible. (11 U.S.C. § 1329.)
If you need only short-term relief, you can ask the trustee to defer a payment, though not for long. Here’s how modification works, what limits it, and what to do if the court says no.
What Happens If Your Income Goes Down During Chapter 13 Bankruptcy?
It depends on which debts your plan pays and how much of your payment goes to creditors you don’t have to pay in full. When you file for Chapter 13 bankruptcy, you propose a plan to pay back a portion of your debts. A Chapter 13 repayment plan typically takes three to five years to complete, and debtors often experience income fluctuations.
In addition to your income, your monthly plan payment amount depends on:
- your expenses
- the types of debts you have, and
- the amount of nonexempt property you own.
Because the bankruptcy judge can’t change the Chapter 13 payment rules, the last two factors affect whether you can reduce your payment. Here’s how.
You Must Repay Certain Debts
The judge usually can’t reduce your payment if the plan is paying only debts you must repay in full. Those include past-due alimony, past-due child support, and priority tax obligations. You must also cure arrears on a home or car you’re keeping and pay the trustee’s and attorney’s fees. (11 U.S.C. §§ 1322(a)(2), (b)(5); 11 U.S.C. § 1325(a)(5).)
But if your plan includes debts you don’t have to pay in full, such as credit card debt, medical bills, or personal loans, you might be able to reduce how much you pay those creditors, possibly to zero. However, it isn’t always possible because you must also comply with the next rule.
You Must Pay to Keep Nonexempt Property
Your payment can’t drop below the value of your nonexempt property. Under the “best interest of creditors” test, unsecured creditors must receive at least as much as they would have received in Chapter 7, measured as of the plan’s effective date. These are creditors with debt that isn’t protected by collateral, like a house or car. (11 U.S.C. § 1325(a)(4).)
A rough way to estimate this amount is to add up the value of your nonexempt property, or the property you’d have lost in Chapter 7. Then compare that figure to what your plan pays your unsecured creditors, including priority creditors. If your plan pays more than that amount, and the extra isn’t going to alimony, child support, or a priority tax obligation, the judge could lower your payment by the difference.
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, leaving a nonexempt amount of $10,000. So she must pay her unsecured creditors at least $10,000 through her Chapter 13 plan (maybe less if the court allows a deduction for sales costs). 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
A modification requires you to file a motion explaining that your financial situation changed and asking the court to approve a lower payment. You serve it on the bankruptcy trustee and your creditors, along with proof supporting the amended plan, such as recent pay stubs and updated income and expense schedules.
Many times, a hearing will be set for objections, and the trustee or a creditor can object. If no one does, the court will normally grant the motion. Because a modified plan can’t run longer than five years from the date your first plan payment was due, if your plan already lasts five years, you can't extend it. (11 U.S.C. § 1329.)
Most modifications take place after the court confirms a plan. Before confirmation, you can usually change your proposed plan by filing an amended version and providing it to the trustee and your creditors before the confirmation hearing. This commonly happens after you informally resolve an issue with the trustee or a creditor, or after the court doesn't confirm the proposed plan after hearing an objection (you're often given time to fix the problem).
Can You Defer a Chapter 13 Payment?
Yes, it's possible, but likely not for long. Your first option is to approach the Chapter 13 trustee. In some instances, depending on local practice, the Chapter 13 trustee will defer payment for a month or two. But you should expect to increase your monthly payment until you catch up. Here's why.
Why the Trustee Can't Defer for Long
When you proposed your Chapter 13 plan, you calculated the amount you'd need to pay creditors. If you miss a payment, your mortgage servicer or another creditor might assess a late fee and other penalties, increasing the amount the trustee would need to keep your payment current. This can also occur when a servicer adjusts your monthly payment amount to reflect increases in escrowed payments such as property tax and homeowner’s insurance.
Most attorneys build a small amount into the plan to cover such contingencies, but it won't be much. So the trustee won't be able to defer your payment for long, even when extra money is available.
Consequences If You Don't Catch Up
If the trustee allowed you to fall behind for months, you'd likely still owe money at the end of the plan. The trustee will want to avoid that situation, so expect the trustee to ask the court to dismiss your case sooner rather than later. If the trustee won’t or can’t defer your payment, your attorney might adjust your plan and file a motion with the court asking for "relief" or the help you need.
What If You Can’t Lower Your Chapter 13 Plan Payment?
Depending on your case, if you can’t reduce your payment by modifying the plan, you might be able to:
- ask to suspend payments temporarily
- request an early hardship discharge
- convert your Chapter 13 to Chapter 7, or
- dismiss your Chapter 13 bankruptcy and refile at a later time.
Here's how each option works and the limitations. Because several of these limits come from the same rules that apply to plan confirmation, reviewing how to calculate a Chapter 13 plan can explain some option limitations.
| Option |
What It Does |
Main Limit |
|
Plan Modification |
Permanently lowers your payment or changes the plan length. |
You must still pay priority debts, arrears, and the value of your nonexempt property within five years. Generally, you're limited to reducing the amount paid to nonpriority unsecured creditors. |
|
Trustee Deferral |
Delays a payment for a month or two. |
You'll still owe the missed amount, so you'll need to make it up through higher payments. You'll also need to pay any late fees and costs the creditor charges (usually on a mortgage or car payment). |
|
Hardship Discharge |
Ends your case without completing the plan. |
The cause must be beyond your control, creditors must have received at least what they would have received in Chapter 7 (nonexempt property value), and modification must not be practicable. (11 U.S.C. § 1328(b).) |
|
Conversion to Chapter 7 |
Replaces the repayment plan with a liquidation case. |
You might lose nonexempt property, and you must qualify for Chapter 7. (11 U.S.C. § 1307.) |
|
Dismissal and Refiling |
Ends the case so you can file again later. |
Creditors can resume collection, and the automatic stay in a new case may be limited. (11 U.S.C. § 1307(b); 11 U.S.C. § 362(c)(3), (4).) |
Next Steps If Your Income Drops
Contacting your Chapter 13 bankruptcy attorney as soon as you know your income is changing can preserve your options. If you'd like more answers, try the following articles:
