What Happens if I Lose My Job in the Middle of my Chapter 13 Case?

“I filed Chapter 13 bankruptcy about three years ago and last week I was laid off. I don’t know how I can make my $395 per month trustee payment. Is there anything I can do?” In my Chapter 13 practice, I receive emails like this at least once every month or two. What should a Chapter 13 debtor do if he loses his job and cannot make the trustee payment?

First, you should contact your Chapter 13 lawyer immediately. Unless we hear from you, we have no way of knowing that there has been an interruption in the funding of your case. There is a good chance that the judges or Chapter 13 trustees in your bankruptcy district have a procedure to deal with this problem – you will have more options if your lawyer gets moving early.

In the Northern District of Georgia, where I practice, the three standing Chapter 13 trustees have put into place a procedure whereby a debtor can request a two month deferment in payments without the need to file a formal motion or appear at a hearing. The debtor’s attorney needs to make sure that the informal deferment does not cause a term problem in the Chapter 13 (i.e. cause the Chapter 13 to extend beyond 60 months) and the trustee deferment does not impact in any way the rights of secured creditors to file motions for relief from the stay. However, this informal deferment can take some pressure off the debtor. Your Chapter 13 trustee may have a similar policy – or not – you need to check with your lawyer.
If there is no informal deferment in your district or if the interruption in your plan payments will be extended your lawyer will probably have to file a formal motion in bankruptcy court to ask the judge to authorize a deferment. Your lawyer should have some idea about how the judge assigned to your case will rule on this type of motion.

What happens if you simply stop paying into your plan? Here, too, local practice and procedure will determine the course of events. In the Northern District of Georgia, the trustee will hold you to a strict compliance for plan payments during the first six months of your plan. There are also circumstances when this strict compliance period could be extended to a year or even longer. A failure of funding during the strict compliance period will result in an automatic dismissal, without the need for notice or hearing.

Beyond six months, you can expect the Chapter 13 trustee to file a Motion to Dismiss if the funding lapses in your case. In general, if a Motion to Dismiss is filed, you and your lawyer will have an opportunity to negotiate a repayment over time for your missed trustee payments. Here, too, check with your lawyer about the local practice and procedure in your particular bankruptcy filing district.
When I file a Chapter 13 case, I always bring up the issue of missed payments. Most people are optimistic by nature and no one likes to think about a job loss or unexpected illness. If the plan payment is not too large, I recommend that my client find a way (temporary job, garage sale) to set aside one or two trustee payments for emergency situations.

Deferments and consent orders on Motions to Dismiss can save a case, but you will most likely have only one opportunity to use these remedies. Keep them in reserve.

I hope you can also infer from this post the advantage of choosing an experienced bankruptcy lawyer who will take your calls and go to bat for you if you face an interruption in the funding of your case. Inexperienced lawyers may not know about the local procedures in your district and lawyers in high volume practices may not have time to focus on your specific needs. An experienced Chapter 13 lawyer who will take the time to zealously represent your interests is always your best bet.