Sometimes a debtor faces a change of circumstances after having been in a Chapter 13 plan for a while. If either your income decreases, or legitimate expenses increase, you may no longer be capable of continuing with the plan as originally confirmed. What can be done?
I. Motion To Temporarily Suspend Payments Or Modify The Plan
A. Temporarily Suspend Payments
If you have experienced a minor and temporary setback, we can file a motion to temporarily suspend plan payments. This arises, for example, if you have had an unexpected expense, say for a medical emergency, or a temporary income reduction, say due to temporary disability, and will be able to resume plan payments in a couple of months. The motion to temporarily suspend plan payments gives you a brief respite to deal with the temporary problem.
B. Modify The Plan
If you have a permanent change in circumstances that makes the confirmed plan payments impossible to make, we can file a motion to modify the plan. Keep in mind that the modified plan still has to satisfy such requirements as the Chapter 7 liquidation, fairness, and feasibility tests.
If the reason you have had a permanent change of circumstances is due to the need to buy a new car, then as part of the process we must file a motion for authority to incur new debt. Indeed, anytime you, as a Chapter 13 debtor, want to engage in a significant financial transaction, we must get the judge’s permission through motion.
Warning: Remember that you must send the Trustee tax returns each year. Therefore, if your income increases the Trustee may seek to use 11 U.S.C. § 1329(a) to have the plan payments increased. Although we have never had this happen in any of our cases, it is a possibility.
II. Convert To Chapter 7
If you have experienced a permanent reversal of fortune that makes it impossible to make any plan payments, you may convert to Chapter 7. The Chapter 13 Trustee will then file a final report and the Court will assign a Chapter 7 Trustee to the case. There will be a new 341(a) meeting with the Chapter 7 Trustee.
Important Caveat: You must qualify for Chapter 7 relief for conversion to be possible.
Keep in mind that since the converted case is now under Chapter 7, your non-exempt property, if any, is subject to seizure by the Chapter 7 Trustee. Therefore, you may wish to consider seeking Chapter 13 hardship relief.
III. Motion For A § 1328(b) Hardship Discharge
Another option when you can no longer make plan payments is to request a hardship discharge under § 1328(b). The debtor must show to the Court’s satisfaction that:
- The debtor’s failure to complete such payments is due to circumstances for which the debtor should not justly be held accountable;
- The value, as of the effective date of the plan, of property actually distributed under the plan on account of each allowed unsecured claim is not less than the amount that would have been paid on such claim if the estate of the debtor had been liquidated under chapter 7 of this title on such date [this is just the Chapter 7 liquidation test we have already discussed]; and
- Modification of the plan under section 1329 of this title is not practicable.
Two benefits of the hardship discharge over the Chapter 7 conversion are: (a) there is no danger of your losing non-exempt assets, and (b) less time is required to pass before you are eligible to file another bankruptcy.
Two benefits of the Chapter 7 conversion over the hardship discharge are: (1) the conversion only requires a notice – no motion, or notice and a hearing are required, and (2) debts incurred after filing the Chapter 13 petition are dischargeable in the converted Chapter 7.
It should be noted that since the filing date for the converted case is the date that the original Chapter 13 case was filed, if the reason you went into Chapter 13 rather than Chapter 7 was because of the time restriction of § 727(a)(8), then you will not be able to convert to Chapter 7. Then a hardship discharge will be the only vehicle for relief.
A final option you have is to dismiss the case. This approach should be used only if there is no other option available for several reasons. First, if you need to re-file within the twelve months after dismissal, the automatic stay of 11 U.S.C. § 362(a) is no longer automatic (see 11 U.S.C. §362(c) for details). Second, during the pendency of the Chapter 13 case the interest on debts such as credit card and loan shark debts stops accruing. However, if the case is dismissed that interest will come crashing down on you like a tidal wave. Finally, it is a pity not to get some sort of discharge after having paid all of the costs and attorney’s fees associated with a Chapter 13 bankruptcy.