Let me be perfectly clear: Chapter 13 is a long-term commitment. Once we file your petition, you will make payments to the trustee for between three and five years.
As soon as I mention that to my clients, the next question is usually, “what if I can’t make a payment?” That’s a fair question and fortunately the Bankruptcy Code anticipates that a Chapter 13 filer might have a change in circumstances over the course of her bankruptcy period.
Section 1329 of the Bankruptcy is where we can look to find out what a debtor can do in this situation. It provides that any time after your plan is confirmed you can ask the court to reduce the amount of your payments or the length of your plan. The court cannot, however, approve a plan that’s longer than five years. Section 1329 expressly provides that you can modify your plan to pay for health insurance as long as you show that it’s necessary.
Of course, there’s a trade off. Section 1329 also allows the trustee or any of your creditors to ask the court for a modification if your income goes up. We’re probably talking about a significant increase, though. Likely more than the 3% raise you get every year to account for inflation (if you’re lucky enough to even get that).
If you’ve had such a significant change of circumstances that you can no longer make any payment, you can ask the court for a hardship discharge, or you can ask the court to convert your case to a Chapter 7. A conversion to Chapter 7 means that your debts will be discharged soon after the conversion is approved.
Finally, keep in mind that there are two primary reasons that someone would file Chapter 13 instead of Chapter 7. The first is if they make too much money and exceed the Chapter 7 income limits. Second, many filers will choose Chapter 13 because they can get caught up on any back payments they owe on their mortgage. If neither of these circumstances apply to you, Chapter 7 is probably a better option. The entire Chapter 7 process only takes about four to six months and doesn’t require you to repay any of your dischargeable debts.
If you’re already in a Chapter 13 plan and can’t make your payments, you should talk to your attorney or trustee as soon as possible. If you default, the trustee will ask the court to dismiss your case. As long as you can get caught up on your payments, the court will probably keep your case open. Do it a few times and the court probably won’t be as understanding as the first time. If the court dismisses your case and you haven’t paid off any of your debts, you’ll likely be in the same place as before you filed. Your creditors will resume their collection activity.
If you’re considering bankruptcy, we hope you’ll come in for a free, no-obligation consultation with an experienced bankruptcy attorney to find out if bankruptcy is a good option for you. You can make an appointment by using our online scheduling system or call 303.331.3403 to set a time that’s convenient for you.