Options if You Can't Make Your Chapter 13 Plan Payments

Completing a Chapter 13 repayment plan isn't easy. If you fall behind on your Chapter 13 plan payments, your bankruptcy trustee or a creditor will usually ask the court to dismiss your case for nonpayment. However, if you're struggling to make payments, consider some options that might help you save your bankruptcy and obtain a discharge. Read on to learn more about what you can do if you fall behind on your Chapter 13 plan payments.

(Learn about the Chapter 13 plan, including what it is, what you must pay in it, and more, in The Chapter 13 Repayment Plan.)

If your Chapter 13 payments are too high, you might be able to modify your plan to make it more affordable. Reducing your payment amount will be easier if your payments are based on your income and expenses and how much disposable income you have each month.

Defer a Chapter 13 Payment

Many bankruptcy debtors miss plan payments because of a temporary financial emergency, like an unexpected car repair or medical bill. Deferring a payment or two might be all the help you need. Most debtors can get caught up if given enough time.

If you're risking dismissal for nonpayment, your first step is to speak with the trustee. If you miss a payment, or even two, the trustee might let you catch up over a month or two. If the trustee isn't reasonable (which is rare), you can explain your circumstances to the court by filing a written opposition to the motion to dismiss and arguing your side at the motion hearing. You'll request more time to catch up on your plan arrears and explain how you'll be able to do so. If you make a convincing argument, most courts will allow you more time or add a specific catch-up plan to your Chapter 13 plan to cure your default.

Temporarily Suspend Your Chapter 13 Plan Payments

If it isn't possible to resolve your financial emergency (for example, you lost your job, or your employer permanently reduced your pay), you might be able to reduce your payments by asking the court to modify the amounts paid through your repayment plan.

In your motion, you'll need to propose a new payment amount and provide the court with documentation showing your changed circumstances. However, keep two things in mind:

1. When your plan is mostly priority debt. If your plan pays mostly debts that you must repay fully--priority debts such as domestic support arrearages and certain tax debt--you won't be able to reduce your payment amount. In that case, a modification won't be possible. Here's an example:

Example: Paul owes $12,000 in income tax and $15,000 in child support, for a total of $27,000. Both of these debts are priority debts that must be paid in full by the end of the five-year plan. Paul's plan payments are $450 per month. This is the minimum amount Paul can pay each month to complete his plan in 60 months. If the minimum amount is too much, Chapter 13 isn't a good option for Paul.

2. When you're close to the end of your plan. Chapter 13 plans can last a maximum of 60 months. Depending on how much time you have left, your remaining plan payments might need to increase in order for you to completely pay off the debts by the end of the bankruptcy period. If you're close to the end of your plan, meeting those new payment amounts could be too difficult.

This example illustrates what happens when Margo has trouble making her $300 plan payments near the end of her five-year plan.

Example:

Margo loses her job when she's four years into her plan. She has twelve payments to go, which total $3,600. She misses three payments before she gets a new job. She still has $3,600 left to pay in her plan, but only nine payments in which to do it. She would have to modify her plan to raise her payments to $400 in order to pay all she owes by the end of her five-year plan period. If Margo's new job didn't pay enough for her to afford the new higher payment amount, the court might not approve the modification.

Next, imagine that Margo was 54 months into her 60-month plan. At that point, she owes just $1,800 and has only six months left. She loses her job and must skip three months. That leaves her just three months in which to pay $1,800, or $600 per month. Unfortunately, Chapter 13 plans can't be extended beyond 60 months after the date the first payment was due. Therefore, Margo will have to make sure those three $600 payments are made before the end of the five-year plan period.

(For more information on how to reduce your plan payment amount, see Modifying Your Chapter 13 Plan Payment.)

Request a Hardship Discharge

If you can't continue with your Chapter 13 bankruptcy, you might be eligible to receive a hardship discharge even though you haven't completed all of your required plan payments. The court will analyze your financial situation and what's best for your creditors before granting a hardship discharge.

However, most filers won't get any debt wiped out through a hardship discharge. Because the court won't sell any of your property when you ask for a hardship discharge, to wipe out any debt, your nonpriority unsecured debts—such as credit card and medical bills—must have received through the Chapter 13 repayment plan as much as they would receive if the case had been filed as a Chapter 7.

It's rare for this to happen because most trustees wait until the end of the plan to pay these creditors (trustees pay higher priority debt first). Also, a hardship discharge won't wipe out your priority debts that you're required to pay, such as certain taxes or domestic support obligations (like child support and alimony). So, you will still owe those priority debts after the bankruptcy case is closed.

(To learn more, see Getting a Chapter 13 Hardship Discharge.)

Convert to Chapter 7

If you can't make or modify your monthly payment, and if you won't get any benefit from a hardship discharge, you might want to consider converting to Chapter 7. Converting to a Chapter 7 is different than a hardship discharge in several ways—but especially in one crucial aspect: The Chapter 7 bankruptcy trustee will sell your nonexempt property—property that you can't protect with a bankruptcy exemption—for the benefit of your creditors. And all of your qualifying debt will get wiped out.

You'll have to qualify for a Chapter 7 discharge (most courts require you to pass the means test, and you're entitled to a discharge only once every eight years). Also, it won't get rid of your priority debts or allow you to catch up on your mortgage arrears.

(To learn more, see Converting a Bankruptcy Case From Chapter 13 to Chapter 7.)

Dismiss Your Case and Refile

If none of the options above allow you to meet your goals, you can always let the court dismiss your case and refile another Chapter 13 bankruptcy. This might be your best option if you can't afford your Chapter 13 plan payment right now and a Chapter 7 bankruptcy doesn't make sense.

Once your financial situation improves, you can file another Chapter 13 to pay your debts. But keep in mind that once you've dismissed your case, you won't have the benefit of the automatic stay (the order that stops your creditors from collecting while you're in bankruptcy). Also, the automatic stay isn't always put in place when you file successive bankruptcy cases. Depending on when you file, you might have to ask the court to extend the automatic stay in your matter.

(To learn more, see How Bankruptcy Stops Your Creditors: The Automatic Stay.)