I Can’t Make My Chapter 13 Payment: Now What?

Chapter 13 bankruptcy offers a possible solution for people who have suffered a temporary interruption of income or are facing financial trouble because of large, but temporary expenses. For example, someone with stable income and assets to protect may be knocked off course by a period of unemployment. Alternatively, a person with stable income, a home, a nice car, and other property may face a medical crisis and end up with a pile of bills that do not fit in the budget.

A Chapter 13 repayment plan allows the filer to repay past due balances over time, while making current payments on mortgages, car loans, and other debts. As long as plan payments are current, there is no collection activity on those past-due amounts. Late fees on those balances stop accruing, and in most cases, the interest rate on debt may even be lowered. At the end of the plan, some remaining unsecured debt may be discharged and assets that might be at risk in a Chapter 7 case are protected.

Chapter 13 is a Popular Option in Alabama

Across the country, there are more Chapter 7 filings than Chapter 13. Yet in Alabama, Chapter 13 is more common. For the 12 months ending September 30, 2020, about 58% of Alabama consumer bankruptcy cases were filed under Chapter 13. The prevalence of Chapter 13 varies within the state. In the Northern District of Alabama, which includes the cities of Birmingham, Florence, Gasden and Huntsville, there were slightly more Chapter 7 cases than Chapter 13. However, in the Middle District, which includes Montgomery, there were nearly three times as many Chapter 13 cases as 7.

There is one significant concern about Chapter 13. The repayment plan lasts for three to five years. Someone who has already been thrown into financial turmoil by job loss, a serious illness or injury, or some other unexpected event may be worried about making that commitment. After all, another crisis could arise.

So, what happens if income is interrupted or something else disrupts the family budget while a Chapter 13 repayment plan is underway?

Options When You Can’t Make Chapter 13 Payments

The solution for someone who can no longer keep up Chapter 13 payments depends on the circumstances. For instance, is the inability to pay temporary or long-term? Would it be realistic to make smaller payments? What types of debt are included in the plan?

Depending on the specifics, the possible options may include:

Suspension of Plan Payments

If the reason you are unable to make plan payments is short-term, you may be able to suspend plan payments. For example, if you require surgery and will be off work for six weeks, your bankruptcy trustee may agree to allow you to skip one or two plan payments and resume payments when you are back to work. Suspension of your Chapter 13 plan is within the trustee’s discretion and does not always require a hearing or court order. However, the trustee can only suspend up to three payments. If the interruption in income or emergency expense will impact your payments for longer than three months, modification may be the answer.

Modification of the Chapter 13 Plan

When circumstances change, it may be possible to modify your Chapter 13 plan to make payments more manageable. However, a modified plan must be approved by the court, just like the original plan. A Chapter 13 plan can only be modified if the petitioner still has enough income to make payments that will cover secured debts and priority unsecured debts. That may not be workable in the case of ongoing job loss, disability, or another significant and ongoing decrease in income.

Some possibilities for modification may include:

• Eliminating or reducing payment for unsecured, non-priority debts
• Extending the repayment period, within certain limitations
• Surrendering secured property to lower the total repayment amount owed
• Dismissal

Dismissal of the Chapter 13 case is always an option. Some debtors choose this option if modification is not possible and the debtor does not want to or is not eligible to convert to Chapter 7. However, it is important to understand what dismissal will mean. The automatic stay will immediately terminate when the case is dismissed, meaning that creditors can begin collection activity again. That includes not just calls and letters but potentially lawsuits, wage garnishments, repossession, and other actions.

Conversion to Chapter 7

Some people who are unable to continue with Chapter 13 plans may be able to convert to Chapter 7. Of course, you must be eligible for Chapter 7. That means you must income qualify, not be time-barred based on a prior bankruptcy case, and not otherwise be prohibited from filing.

Converting to Chapter 7 works well for some people who can’t complete a Chapter 13 case, but isn’t right for everyone. For example, someone who has non-exempt assets they hope to keep may not want to convert to Chapter 7, since the trustee may liquidate those assets for the benefit of creditors. In addition, if the reason for the Chapter 13 filing was to prevent a foreclosure or manage other secured debt, Chapter 7 does not provide the same protection.

Hardship Discharge

The Chapter 13 hardship discharge is not available to everyone. Generally, the debtor must be unable to pay through no fault of their own, and the inability to pay must be expected to continue. For example, a hardship discharge might be granted when an older debtor experiences a serious medical crisis or disability and is unlikely to be able to return to work.

There are other requirements, as well. For instance, a hardship discharge will not be granted unless unsecured creditors will be just as well off as they would in a Chapter 7 case. It is an easy analysis to determine if the debtor has no non-exempt assets, meaning there are no assets for distribution and unsecured creditors receive nothing in a Chapter 7 case. However, if there are non-exempt assets, the calculation is a bit more complicated.

Perhaps most important, a hardship discharge will not necessarily solve your problems. While unsecured debt may be wiped out through a hardship discharge, secured debt is not discharged, and you may still face collection action, including repossession or foreclosure.

Talk to Your Bankruptcy Lawyer

The first step when you recognize that you may have a problem making Chapter 13 payments is to contact your attorney. In most cases, the very worst thing you can do is nothing. The sooner you explore your options, the more likely it is that you may be able to find an alternative that helps achieve your goals.

Of course, that is true in the earlier stages, too. If you are struggling financially and haven’t arrived at a solution, a consultation with an experienced bankruptcy lawyer is your best next step. At Bond & Botes, we help people resolve debt in Alabama, Tennessee, and Mississippi. You can schedule your free consultation right now by calling 855-932-2156 or filling out the contact form on this page.