An earlier post discussed what would happen if a debtor’s income increased significantly. Quite frankly, that just doesn’t happen to most of my clients….they usually have decreased income due to lay-off, unemployment, illness, divorce, or a death of the family wage-earner.
Does this mean the Chapter 13 Plan which was carefully set up calculating all income coming into the household is now doomed?
As my colleague Susanne Robiscek, a North Carolina bankruptcy attorney, stated in her blog on Bankruptcy Law Network back in July 2008, folks in Chapter 13 need to know that their plan is modifiable at any time. Just as it can increase when income goes up; it can decrease when income goes down or expenses go up.
The down side to a decrease in payments is when a debtor is already in a five-year plan paying secured and priority creditors in full with zero dollars being paid to the unsecured creditors. If their plan payment is already as low as it can be, and the plan will take a full five years to complete, if the plan payment is lowered for a temporary period of time, it will have to be increased significantly to get the plan paid in full in five years.
For example, say a debtor is paying a vehicle in a chapter 13 and their payment is $625 per month and their last payment will be made at month 60. If they skip two months of payments, there is $1250 that will need to be made up at some point, either as two additional payments or amortized over the remaining months. If the debtor misses payments in year 1, then over 50 months, this is not a big hardship (1250 divided by 50 equals about 25 dollars more per month). But what if the debtor misses those payments in year 4 when they have only 6 months left to pay? The last four months, the payments will be an additional $315 per month.
As recommended in the previous article, if a debtor knows that his income is going to be dramatically reduced, the first thing to do is talk to the bankruptcy attorney so that the attorney can advise of the best method of handling the reduced wages. What should not happen is that plan payments are missed, phone calls from the attorney are ignored and the Trustee moves for dismissal of the case–not when modifying a plan is an option.
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