What Happens If You Miss a Chapter 13 Payment?

Successfully managing a Chapter 13 bankruptcy repayment plan requires consistent financial discipline. This structured debt repayment process allows individuals with regular income to repay creditors over a period, typically three to five years. The plan’s success hinges on the debtor’s ability to make regular, scheduled payments to a court-appointed trustee. Unforeseen circumstances can lead to a missed payment, which can jeopardize the entire bankruptcy case. This article outlines the steps and potential outcomes when a Chapter 13 payment is missed.

Initial Trustee and Debtor Actions

When a Chapter 13 payment is not received as scheduled, the Chapter 13 trustee, who oversees the repayment plan, will identify the missed payment. While there is no formal grace period, a payment not made by its due date is considered late. Trustees often allow a short practical window, perhaps a week, before considering a payment significantly overdue.

Upon identifying a missed payment, the trustee monitors compliance with the plan and reports issues to the court. The debtor may receive a notice of payment default or a notice of intent to file a motion to dismiss the case from the trustee. A single missed payment can legally trigger a motion to dismiss, though trustees commonly wait until two or three payments are missed before taking formal action.

Debtors should immediately review their financial situation to understand the reason for the shortfall and contact their bankruptcy attorney. Proactive communication with legal counsel and the trustee is important. Promptly attempting to make up the missed payment can help prevent more serious consequences.

Options for Resolving Missed Payments

When a Chapter 13 payment is missed, several avenues exist for the debtor to resolve the default and maintain their bankruptcy plan. The simplest solution involves making up the missed payment or payments, often called curing the default. If the financial setback was temporary, the trustee may allow the debtor a month or two to catch up, possibly requiring extra payments to cover any accrued interest or late fees.

If missed payments stem from a genuine change in financial circumstances, such as job loss, reduced income, or unexpected significant expenses, a formal plan modification may be necessary. Debtors can file a motion to modify their Chapter 13 plan under 11 U.S.C. § 1329. This process allows for adjustments such as extending the plan term or reducing monthly payments, provided the court approves the changes. A proposed modified plan must include an explanation of the requested changes and supporting documentation.

Another possibility is a hardship discharge under 11 U.S.C. § 1328. This option is available if the debtor’s inability to complete plan payments is due to circumstances beyond their control, such as severe illness or permanent disability. Creditors must have received at least as much as they would have in a Chapter 7 liquidation, and plan modification must not be possible.

Debtors can also attempt to negotiate informally with the trustee. This may involve explaining the situation and proposing a solution before formal court action is initiated. Working with the trustee can help ensure the plan stays on track and potentially avoid a motion to dismiss.

Court Initiated Actions for Unresolved Defaults

If missed payments are not resolved, the Chapter 13 trustee or another interested party can take formal legal action. The most common action is filing a motion to dismiss the Chapter 13 case. This motion asks the bankruptcy court to terminate the proceedings due to the debtor’s failure to comply with the repayment plan.

Upon filing a motion to dismiss, the court will schedule a hearing. The bankruptcy judge will consider the reasons for the default and decide on a resolution. If the motion is granted, the court will issue an order dismissing the case, meaning the debtor’s debts are not discharged, and bankruptcy protection is withdrawn.

Alternatively, the court may consider a motion to convert the case from Chapter 13 to Chapter 7. Under 11 U.S.C. § 1307, the court may convert a Chapter 13 case to a Chapter 7 liquidation if there is a material default by the debtor. This conversion changes the bankruptcy from a repayment plan to a process where non-exempt assets are liquidated to pay creditors.

The court’s ruling follows a review of the circumstances, which may include the debtor’s response to the motion and any proposed solutions.

Practical Consequences of Plan Failure

The failure of a Chapter 13 plan, whether through dismissal or conversion, carries significant implications for the debtor. Upon dismissal of a Chapter 13 case, the automatic stay, which protected the debtor from creditor collection efforts, is lifted. Creditors are then free to resume their pre-bankruptcy collection activities, including:
Wage garnishments
Repossessions
Foreclosures
Lawsuits to collect on outstanding debts

For dismissed cases, any payments made into the Chapter 13 plan are not refunded to the debtor, and original debts revert to their pre-bankruptcy status. Assets protected under the Chapter 13 plan are no longer shielded from creditor actions.

If the case is converted to Chapter 7, a Chapter 7 trustee is appointed. This trustee’s primary role is to gather and sell the debtor’s non-exempt assets, using the proceeds to pay creditors according to Bankruptcy Code rules. While some assets are exempt from liquidation, others are not, and their sale can result in the loss of property.

The dismissal of a Chapter 13 case can affect a debtor’s ability to file another bankruptcy case. If a case is dismissed, a debtor may face a 180-day bar from re-filing under 11 U.S.C. § 109. Multiple dismissals within a short period can also lead to limitations on the automatic stay in any subsequent filings.