My Chapter 13 Payments Are Too High: What Can I Do?

A Chapter 13 bankruptcy repayment plan can become a source of financial strain. Changes in income, expenses, or household composition can make previously manageable payments challenging. When a debtor finds their Chapter 13 payments too high, understanding the available options is important for maintaining their plan and achieving debt relief. This article explores avenues debtors can pursue to address unmanageable Chapter 13 payments.

Evaluating Eligibility for Payment Reduction

A significant change in financial circumstances is required to justify a reduction in Chapter 13 payments. Common examples include job loss, a substantial decrease in income, or an unexpected increase in necessary living expenses. These increased expenses might stem from medical emergencies, increased childcare, or other unforeseen financial burdens. A shift in household composition, such as a divorce or the addition of a dependent, can also alter a debtor’s financial landscape.

The core of a Chapter 13 plan is based on a debtor’s disposable income, which is the amount remaining after accounting for reasonable and necessary living expenses. Any modification to a plan involves a reassessment of this disposable income. A reduction in income or an increase in unavoidable expenses directly lowers disposable income, potentially making a lower plan payment feasible.

Any proposed modification must satisfy the “best interest of creditors” test. This test ensures unsecured creditors receive at least as much through the modified Chapter 13 plan as they would have received if the debtor’s assets had been liquidated in a Chapter 7 bankruptcy case. If a debtor’s non-exempt assets are minimal, this test might be easier to satisfy with a reduced payment.

To demonstrate a material change in circumstances and support a request for payment reduction, debtors must gather specific documentation. This often includes recent pay stubs or other income statements showing reduced earnings, updated expense lists detailing increased costs, and documentation for new financial burdens like medical bills. Providing clear and comprehensive evidence of the financial shift is crucial for the court to consider any adjustment to the plan.

Methods for Adjusting Your Chapter 13 Plan

When facing unmanageable Chapter 13 payments, debtors have several pathways to explore for adjustment. The most common approach is a plan modification, which allows for changes to the original repayment terms. This can involve reducing the monthly payment amount, often by lowering payments to unsecured creditors. A modification can also entail extending the plan’s duration, though the total repayment period cannot exceed 60 months, or five years, from the date the case was filed. This extension can lower monthly payments by spreading the total obligation over a longer period.

A hardship discharge allows the court to discharge remaining debts even if the debtor has not completed all plan payments. This discharge is granted under specific conditions. The debtor must demonstrate that their failure to complete payments is due to circumstances beyond their control, such as a severe illness or permanent disability that prevents them from working. Creditors must have received at least as much as they would have in a Chapter 7 liquidation case, and a modification of the plan must not be feasible.

Debtors may also consider converting their Chapter 13 case to a Chapter 7 liquidation. This option is available if the debtor qualifies for Chapter 7, which involves meeting income and asset criteria. Conversion results in the discharge of eligible debts, similar to a standard Chapter 7 case, but it may also require the liquidation of any non-exempt assets to repay creditors. This changes the fundamental nature of the bankruptcy proceeding from a repayment plan to an asset liquidation.

A debtor can also choose to voluntarily dismiss their Chapter 13 case. Dismissal immediately stops the requirement to make plan payments and ends the bankruptcy proceeding. Dismissing a case lifts the automatic stay, allowing creditors to resume collection efforts. While a debtor can re-file for bankruptcy after a dismissal, rules governing subsequent filings, particularly concerning the duration of the automatic stay, can be more restrictive.

Initiating a Plan Adjustment

Once a debtor identifies a suitable method for addressing high Chapter 13 payments, the next step involves initiating the formal process with the bankruptcy court. The first action is to consult with their bankruptcy attorney. The attorney can provide guidance on legal requirements, assess the likelihood of success, and help strategize the best approach given the debtor’s financial situation.

The adjustment process begins with preparing and filing a formal motion with the bankruptcy court. This document might be a “Motion to Modify Plan,” a “Motion to Convert,” or a “Motion to Dismiss,” depending on the chosen course of action. The motion must clearly state the reasons for the requested adjustment and include supporting documentation, such as updated financial schedules, to substantiate the claims of changed circumstances.

After the motion is filed, it must be properly served on all relevant parties, including the Chapter 13 Trustee and all creditors. This notification ensures all parties are aware of the proposed changes and can respond. The Chapter 13 Trustee will review the proposed adjustment to ensure it complies with bankruptcy law and is feasible. The Trustee or any creditors may file an objection if they believe the proposed adjustment is inappropriate or does not meet legal requirements.

A court hearing will be scheduled where the judge will consider the motion. The debtor, often accompanied by their attorney, will present their case and address any questions or objections raised by the Trustee or creditors. If the judge approves the request, a court order will be issued, confirming the modified plan, approving the conversion, or granting the dismissal. This order legally formalizes the change to the debtor’s bankruptcy proceedings.

Consequences of Unaddressed Payment Issues

Failing to address difficulties with Chapter 13 plan payments can lead to serious consequences for the debtor. The most immediate outcome is the dismissal of the bankruptcy case by the court. If a debtor consistently misses payments without seeking modification or other relief, the Chapter 13 Trustee will file a motion to dismiss the case for non-compliance.

Upon dismissal, the automatic stay, which provides protection against collection efforts, is immediately lifted. Creditors are no longer prohibited from pursuing debts outside of bankruptcy. Creditors can then resume actions such as foreclosures on homes, repossessions of vehicles, lawsuits to obtain judgments, and wage garnishments. The protection offered by the Chapter 13 filing ceases to exist.

Dismissal can also impact a debtor’s ability to file for bankruptcy again. While not an outright bar to re-filing, certain rules may apply. If a case is dismissed, a subsequent bankruptcy filing might result in a shorter duration for the automatic stay, or in some instances, the stay may not go into effect at all without a specific court order. These complications emphasize proactively addressing payment issues within the current Chapter 13 case rather than allowing it to be dismissed.

In some limited situations, a debtor whose Chapter 13 case has been dismissed may request reinstatement. However, reinstatement is not guaranteed and is granted only when the debtor can demonstrate a valid reason for the default and a clear ability to resume payments promptly. The court considers various factors when deciding whether to reinstate a dismissed case, emphasizing that proactive engagement is a more effective strategy than seeking reinstatement after a dismissal.