What Do You Do When You Cannot Make Your Chapter 13 Plan Payments?

Well it depends.

It depends on why you can’t make the payments; why did you file Chapter 13 in the first place; and what kind of Chapter 13 you have.

How long is the  inability to pay going to last?

If your cash flow problem is temporary, perhaps you don’t need to do anything.  Some Chapter 13 trustees allow for a temporary suspension of payments or payments for less than required.  This happens frequently because of an illness for a hourly wage earner or an employee who goes temporarily on disability.

But if the failure to pay in full continues long enough, you will have to file and get court approval for an amended plan, or your case will be dismissed.

What kind of Chapter 13 do you have?

There are three basic drivers determining the amount of your Chapter 13 payments.

First, all priority claims must be paid in full.  That is non-negotiable.  If your reduced payments will result in priority claimants to be paid less than in full, your Chapter 13 Plan must be modified or your case will be dismissed.  What are priority claims is a topic for another blog post.

Second, your unsecured creditors collectively must be paid at least an amount equal to or greater than your unexempted assets.   Again, this is non-negotiable.

Third, there are a couple of cash flow analyses that are used, which based on your income, that set a floor which your plan payments must clear.

If your income goes down, then getting a new Chapter 13 Plan is an easy fix if you have the last type of Chapter 13 Plan.  But an amended Plan does not fix the first two types of Chapter 13 cases.    If you cannot makeup the shortage for those first two types of cases, then your case will be dismissed.

Why did you file Chapter 13?

If you filed to prevent a repossession of a vehicle or foreclosure on a house, and your income become insufficient to pay the secured debt on time, then you must recognize that you simply cannot afford to keep that asset.  You’re going to lose it; it’s just a question of when and how.

Your options.

You basically have four options if you can’t catch up quickly and informally:

  1.  File an amended Chapter 13 Plan and have the court approve it.

2.  Convert to a Chapter 7 bankruptcy.

3.  Dismiss your case.

4.  Hardship discharge.  You can get the benefit of the Chapter 13 discharge without completing the payment plan, but only limited circumstances.  That topic will the subject of another blog post.