What Happens if I Cannot Afford to Continue Making My Chapter 13 Plan Payments?

By Kitty J. Lin, Attorney at Law

Let’s face it – the economy is unstable.  If you’re one of the lucky few people that are 100% certain that your job is secure, then you are in the minority.  Most people don’t know if they will still have a job a month from now.  Therefore, it’s not surprising that even if you file a Chapter 13 bankruptcy case, that doesn’t mean your income will be the same throughout the term of your plan.  The basic concept behind the Chapter 13 “Wage Earner” bankruptcy plan is that, taking into account the income that you earn, minus all the allowable deductions, you have some money left over at the end of the month to pay your creditors.  To be considered a good faith filing you need to make sure that all your disposable income is being paid into the Chapter 13 plan. That may be easy to do in the beginning of your Chapter 13 bankruptcy term, but what happens when you receive a pay cut, or worse, lose your job?  Your expenses don’t decrease just because your income does.  Most expenses, like utilities, food and car insurance remain constant.  If there is a loss of income, you may not have sufficient funds each month for your Chapter 13 plan payment.  Therefore, what are some of the options that are available for you?

Converting Your Chapter 13 Bankruptcy into a Chapter 7 Bankruptcy Case

One of the first things to be determined is whether you would otherwise qualify for a Chapter 7 based on your current circumstances.  If you do qualify for a Chapter 7, then you can file a motion with the court to convert your case to a Chapter 7, and have your case be treated like it was a Chapter 7.   This means that you would receive a discharge of all your allowable unsecured debt within three to four months after the conversion to a Chapter 7, and then your case will be closed.

This option is good if you have no arrears for secured debt that you were paying through the Chapter 13 plan.  If there were arrears (for example, if you owed money to your first mortgage lender), then those arrears would need to be paid off.  If you cannot afford to pay back the remainder of the arrears, your collateral may be repossessed or foreclosed.

Essentially, all benefits that you enjoy in a Chapter 13 would no longer be applicable if your case is converted to Chapter 7, such as the lien stripping of a junior mortgage.  Even if the judge granted the motion to strip your junior mortgage, the lien is not taken off your property unless there is a successful completion of your Chapter 13 plan.  Converting your Chapter 13 case into a Chapter 7 case means that your Chapter 13 plan was not successfully completed, and therefore, no lien stripping.

Modifying Your Chapter 13 Plan

If you cannot qualify for a Chapter 7 or it is not in your best financial interest to convert to Chapter 7, the next option is to try to modify your Chapter 13 plan payments to a lower amount.  The judge may allow you to modify your Chapter 13 plan if you can show that there are changed circumstances which make it hard for you to continue making your plan payments.  The amount lowered depends on your specific case.  In some cases the Chapter 13 plan payments are already the lowest possible, and therefore a lower payment will not be feasible in the case.  If that were to occur, then the other possible option is to have your Chapter 13 case be dismissed.

Dismissal of Your Chapter 13 Case

Your Chapter 13 bankruptcy case may be dismissed either voluntarily or involuntarily (by the request of the trustee or creditors) due to non-payment.  If your case is dismissed, then your debts are not discharged, and you are back in the same position as before you filed your bankruptcy case.  Any amounts that were paid to creditors through the Chapter 13 plan will be credited towards your accounts with these creditors, but you will still owe the remaining balance.  If you were behind on your mortgage or car payments at the time the Chapter 13 case was filed, then your house may be foreclosed on and your car can be repossessed after dismissal and loss the protection from the bankruptcy court.

If you are facing some difficulties in your current Chapter 13 case, and you need to seek the advice of an experienced Fremont bankruptcy lawyer or San Jose bankruptcy lawyer, please contact us at 877-9NEW-LIFE or 877-963-9543 for a free consultation.