Modifying Your Chapter 13 Plan Payment

Sometimes everything doesn't go as planned when you file a Chapter 13 bankruptcy case. For instance, if you lose your job, get sick, divorce, or have an unexpected expense like a major car repair, you might have trouble making your Chapter 13 plan payments. Your bankruptcy attorney might suggest that you modify your plan to catch up your payments. If that isn't practical, you might want to convert your case to Chapter 7 bankruptcy or ask the court to enter a hardship discharge.

Proposing a Chapter 13 Plan

When you start a Chapter 13 case, you file a packet of documents with the court. One of those documents is your proposed Chapter 13 plan. At this point, your proposed plan is temporary until the court, trustee, and your creditors have a chance to review and object to it if they wish. If no one objects or all objections get resolved, then the court will "confirm" (finalize) your plan.

After you file your Chapter 13 case, you must begin making monthly plan payments to your bankruptcy trustee—even before confirmation (approval) of the plan. If you fail to make timely plan payments at any point, then your matter will likely get dismissed by the court.

(Learn more in Chapter 13 Repayment Plan.)

Chapter 13 Plan Modification: Timing

Since a Chapter 13 bankruptcy lasts three to five years, it's only natural that your life won't remain constant during that time. Events such as job loss, illness, or an emergency can affect your ability to afford your bankruptcy plan payments. If this happens to you, then you might be able to ask the court to modify your Chapter 13 plan payments to an amount you can afford.

You can modify your plan both before and after confirmation.

• Modification before confirmation. Depending on the case or the court, it can take anywhere from two months to over a year before the court confirms your case. If your circumstances change during this time, you can explain your situation and file an amended plan for the trustee and your creditors to consider. If everything is satisfactory, then the court will confirm your latest plan.

• Modification after confirmation. If the court already confirmed your bankruptcy plan, then you will need to make a motion (ask the court) to modify your plan payments to an amount you can afford. The court and the trustee will ask you to explain why you need to change your plan payments and provide proof of your changed circumstances (such as a job loss or a reduction in income). If satisfied, the court will order a new plan payment for the duration of your case.

Chapter 13 Plan Modification: Limitations

You must pay particular debts in your Chapter 13 plan, including some taxes and all domestic support obligations (these are priority debts), as well as any mortgage arrears on properties you wish to keep. Filers with this kind of debt often run into problems when attempting a modification. Here's why.

If your plan payment amount was sufficient to pay off required debts, then you probably won't be able to reduce your plan payment unless you give up a property on which you were paying arrears. However, if your previous plan paid a percentage to your nonpriority unsecured creditors (such as credit cards), then you can reduce your plan payment by reducing or eliminating the portion going to these creditors. (To learn more, see Debts That Must Be Paid in a Chapter 13 Bankruptcy.)

When a Modification Doesn't Work

If you can't complete your plan payments because of some event that's beyond your control, you might want to convert your case to a Chapter 7 bankruptcy. But sometimes it isn't feasible. Another option is to request a "hardship discharge" by filing a motion with the bankruptcy court.

The Chapter 13 Hardship Discharge

Before receiving a hardship discharge, you'll have to convince the bankruptcy judge that you're suffering from more than just a temporary job loss or disability. Qualifying for a hardship discharge requires you to show that your circumstances will likely be permanent, meaning that you probably won't be in a position to make your Chapter 13 plan payments before your plan term ends.

Also, you'll have to meet "best interests of creditors" test by showing that you've paid your unsecured creditors at least as much as they would have received had you filed a Chapter 7 case.

• You'll pass the test if all of your property is exempt. Unsecured creditors receive nothing in a Chapter 7 case when the filer can protect (exempt) all property. In that case, the best interests of creditors test won't be an issue because you won't owe anything to unsecured creditors.
• If you have nonexempt property, you might not pass the test. But, if some of your property isn't exempt, your Chapter 13 plan payments would have to be high enough that your unsecured creditors would receive an amount equal to the value of your non-exempt property. For purposes of a hardship discharge, this is a difficult condition to meet. In many jurisdictions, the Chapter 13 trustee, who collects the payments and distributes to creditors, will pay higher priority claims first, and unsecured creditors won't be paid anything until near the end of the case.

Example: When Ashley filed her Chapter 13 case, she had company stock worth $10,000, but no exemption to cover it. Therefore, before she could get a hardship discharge, her Chapter 13 plan payments needed to be enough to pay unsecured creditor claims at least $10,000 total. Three years into her plan, she suffered an accident. At that point, the trustee was still paying secured claims, like her mortgage arrearages and car loan, and hadn't paid anything to unsecured creditors yet. Because she hadn't paid anything toward the $10,000 necessary, Barbara wouldn't qualify for a hardship discharge.

(Read Types of Creditor Claims in Bankruptcy: Secured, Unsecured & Priority to learn about claim types in bankruptcy.)

Chapter 13 Plan Modification Isn't Practical

People often modify their Chapter 13 plans to lower or increase payments as their income changes. If you suffered an accident and your income dropped but will return to work at your full salary after six months, you might be able to reduce the plan payments to accommodate your lower income, then increase payments when you returned to work.

If the reduction in your income is permanent, or you're so far into your Chapter 13 plan that you wouldn't have enough time after you return to your regular income to make up the missed payments, then modifying your Chapter 13 plan wouldn't be practical. You might then qualify for a hardship discharge.

Debts Discharged by a Hardship Discharge

A hardship discharge isn't as broad as a regular Chapter 13 or Chapter 7 discharge. Although most general unsecured debts get eliminated, you'll likely remain liable for other claims, including:

• priority claims
• secured debts (including past due payments)
• debts not listed in the bankruptcy paperwork
• student loans
• most federal, state, and local taxes, plus any amounts borrowed to pay those taxes
• child support, alimony, and debts resulting from a divorce or separation decree
• fines or restitution imposed in a criminal proceeding
• debts for death or personal injury resulting from intoxicated driving, and
• loans taken from a pension or profit-sharing plan.

(For more details, read Getting a Chapter 13 Hardship Discharge.)