When you file a Chapter 13 bankruptcy case, you must have sufficient income to fund a Chapter 13 repayment plan, and unemployment can make things very difficult. And with COVID attributed to unemployment and bankruptcy, you can imagine that you are not the only one.
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Your plan payments are based on your income, assets, debts, and financial situation when filing for bankruptcy relief. Let's cover two scenarios:
One of the most important things if you are in your research phase is understand the cost of Chapter 13 per month and comparing Chapter 13 to other debt relief options such as debt management or debt negotiation. For example, debt negotiation may have more payment flexibility in the case of a job loss. As such, Ascend built a free Chapter 13 calculator below that is based on the bankruptcy forms, so you can estimate how much you might pay during a Chapter 13 bankruptcy case. This can also be helpful if you've already filed a case and lost a job.
You pay your plan payments to the Chapter 13 trustee each month. In some cases, a wage withholding order directs your employer to deduct your Chapter 13 payments from your wages and send that money to the trustee. The Chapter 13 trustee disburses the money to your creditors according to the terms of your confirmed Chapter 13 repayment plan.
Most Chapter 13 plans are three-to-five-year installment plans. Unfortunately, situations could arise during your Chapter 13 case that makes paying your monthly bankruptcy payments difficult or impossible, including unemployment or reductions in income.
If you become unemployed during a Chapter 13 case, notify your bankruptcy lawyer immediately. You can do things to prevent your Chapter 13 case from being dismissed. Contact your Chapter 13 bankruptcy trustee to discuss your case only if you represent yourself. Otherwise, it is best to contact your bankruptcy lawyer instead of the Chapter 13 trustee if you become unemployed during a Chapter 13 case.
If you do not pay your bankruptcy plan payment, the Chapter 13 bankruptcy trustee files a motion to dismiss with the court. The court schedules a hearing on the trustee’s motion. If you do not catch up your Chapter 13 bankruptcy plan payments before the hearing date or make other arrangements to settle the matter, the court dismisses your bankruptcy case.
A dismissal of your bankruptcy case means that you owe your debts as if you did not file for bankruptcy relief. As a result, your creditors can take action to collect the debts, including foreclosures, repossessions, wage garnishments, and debt-collection lawsuits.
Many Chapter 13 trustees wait until you are two to three months behind in paying your Chapter 13 plan payments before filing a motion to dismiss a bankruptcy case. However, never assume what your Chapter 13 trustee might do if you miss a payment. Your Chapter 13 trustee may file a motion to dismiss after one or two missed payments.
If you can find a job quickly, there are several ways that you can catch up on your Chapter 13 payments to stay in bankruptcy.
In some cases, the court might allow you to take a two-or three-month break from making Chapter 13 payments. This time allows you to find another job to continue with your Chapter 13 repayment plan.
However, the maximum term for a Chapter 13 repayment plan is 60 months. Your repayment plan cannot extend past five years. Therefore, many Chapter 13 bankruptcy attorneys calculate Chapter 13 plans based on 57 months. That gives individuals a “cushion” if they need a moratorium during your Chapter 13 case. Talk with your bankruptcy lawyer to determine if this option is possible if you lose your job during Chapter 13.
Many Chapter 13 trustees are willing to allow debtors to catch up on their missed Chapter 13 plan payments. For example, they allow debtors to pay a payment and half for six months to catch up on three-month delinquency. Other trustees might set a deadline for you to catch up on the payments.
You might be able to amend your Chapter 13 plan payment to lower your payment when you obtain a new job. For example, if you earn less money with your new job, there could be a substantial change in circumstances that justifies an amended Chapter 13 plan.
However, the Chapter 13 trustee may object to the amended plan. For example, if you voluntarily quit your job to take a lower-paying job, you may need to explain why your actions should not be considered fraudulent conduct to avoid repaying your debts. Your bankruptcy lawyer understands how to argue that it is in the best interest of your creditors that you should be allowed to amend the Chapter 13 repayment plan.
If you cannot find a job after diligently searching for a job or the job you take results in a significant reduction of income, you might be able to convert your case to a Chapter 7 bankruptcy case. You would need to pass the Chapter 7 Means Test to qualify for a bankruptcy discharge.
A bankruptcy discharge is a court order relieving you from the legal obligation to repay a discharged debt. Your creditors are prohibited from taking action to collect debts that were discharged in bankruptcy.
If you convert your Chapter 13 bankruptcy case to a Chapter 7 bankruptcy case, you could discharge your debts as soon as four to six months after the conversion. However, some unsecured debts may not be eligible for discharge, such as student loans, domestic support arrearage, and most taxes. Also, if you are behind on your vehicle or mortgage payments, you would need to catch up on those payments or face repossession and foreclosure actions.
If you lose your job during a Chapter 13 case, don’t wait to talk with your bankruptcy attorney. The sooner you address the problem, the more options you have for dealing with the situation.
If you owe debts you cannot pay, Ascend can help you find a bankruptcy lawyer near you that offers free bankruptcy consultations. You can also explore non-bankruptcy debt-relief options, such as our Savvy Debt Payment Planner. We understand how stressful it is to deal with debts you cannot afford to pay. Contact Ascend to discuss how we can help you get out of debt and on your way to a brighter financial future.