A Chapter 13 Bankruptcy case, also known as a debt-consolidation bankruptcy, is a lengthy process. The repayment plan a person enters when they start a Chapter 13 can last anywhere from 36 to 60 months. Naturally, a lot can change in a person’s life over the course of that time. In this post, I’d like to address some of the most common issues and questions that arise in an ongoing Chapter 13 case.
What If You Can’t Make Payments
The most common worry I hear from Chapter 13 clients is “What if something happens and I can’t make my payments anymore?” This is an issue the Court deals with on a regular basis, and there are several solutions available. First, it is possible to request the Court to suspend your payments for several months, usually 1, 2, or 3 months. If the client has a compelling reason for needing the suspension, such as the loss of a job or sudden unexpected medical bills, then generally the Court is willing to allow the suspension so long as the Chapter 13 Trustee also agrees. However, keep in mind that a Chapter 13 case cannot last longer than 60 months. If your case is already set up as a 60 month plan, then when the suspension ends your Chapter 13 payments would have to increase slightly to account for the months you missed.
Also, it is common for the Judge to order your case be put on probation for a period of time. This means that if you miss a payment in that time period, the Court will dismiss your case immediately, and you would need to refile a new case to regain Bankruptcy protection.
Modification of Chapter 13 Payments
A second and more permanent solution is to petition the Court to modify your Chapter 13 plan to lower your payments for the remainder of the case. If, for example, your employer has cut your hours at work or for some other reason you simply aren’t making as much income as you were when you started the case, then the Court will consider modifying your case. However, for the Court to grant a modification, a person would need to show that they’ve suffered a permanent reduction in income and a whole new household budget would have to be submitted to the Court for approval. Even then, it may be that your Chapter 13 payments are already as low as they can possibly go and still comply with the Bankruptcy laws. Only an experienced Bankruptcy attorney could tell you for certain if a modification or suspension would be right for you.
Convert Chapter 13 to Chapter 7
Lastly, if your circumstances have drastically changed, you may now be able to convert your Chapter 13 case to a Chapter 7 case. This is very common for people who were working when the case started but are now drawing Social Security Disability or a retirement pension. While a Chapter 13 case is designed for people who have some disposable income that can be paid toward their debts, Chapter 7 is designed for those whose entire income is needed to pay necessary living expenses. Chapter 7 cases do not involve a payment plan, so your Chapter 13 plan payments would stop once your case is converted. There are many factors that play a role in determining whether a case can be converted, but a qualified attorney can walk you through the process. If conversion is right for you, then you could receive a discharge of your debts and finish your Bankruptcy case completely in about 90 days.
Using Credit While in Chapter 13
Another common issue is getting or using credit while a person is in Chapter 13. Using credit of any kind has to be approved by the Court and the Chapter 13 Trustee, and generally they will not approve the use of credit except for necessary expenses. Imagine your vehicle has broken down, and you’ll need $1500 to get it repaired so you can get back and forth to work. Before you try to take out a loan to pay for the repairs, the Court would need to know all the terms of the potential loan for approval (i.e. total amount, interest rate, monthly payment, etc.). Once the Court enters an order approving the use of credit, it generally is no problem to get a loan from a bank or credit union. The same rules would apply if you were going to purchase a new vehicle. However, the Court typically won’t approve the purchase of a new vehicle unless you can show that a 2nd vehicle is absolutely necessary or unless you’re replacing a vehicle that was destroyed in an accident.
Suppose your car is destroyed in an accident. What happens to the insurance proceeds you’re supposed to receive? Again, the distribution of these funds has to be approved by the Court first. The Court will have the insurance company send the funds directly to the Chapter 13 Trustee. The Trustee will then use the proceeds to pay off any remaining balance that is still owed on the vehicle, and usually will send the rest to the client so they can use it as a down payment on a replacement vehicle (so long as purchasing a new vehicle is also approved). The insurance company will coordinate with the lien holder on the issues regarding transferring the title. This is the most common way our local Courts handle this situation, but the Judge has wide authority to order the distribution to take place in whatever way is best.
Naturally, every case is different, and the circumstances I’ve written about here can change very much from one case to the next. If you are in a Chapter 13 case and encounter any of the issues discussed here, then be sure to speak with a Bankruptcy attorney as soon as possible. If these worries have been preventing you from considering a Bankruptcy case, then please don’t wait any longer to talk to us about your situation. At Bond & Botes, our affiliated offices offer free initial consultations. Please feel free to call one of our conveniently located offices to set up a private consultation with one of our experienced attorneys.