Chapter 13 Bankruptcy Plan Payments Can be Lowered if Your Income Decreases

by Peter Orville, Binghamton Bankruptcy Lawyer

June 26, 2012

When a Chapter 13 bankruptcy plan gets confirmed by the Bankruptcy Court, the monthly payments you are supposed to pay to the trustee are set by the confirmation order. But they are not always set in stone.

A Chapter 13 bankruptcy Plan can usually be modified if there is a significant and unanticipated change of circumstances, such as an unexpected reduction in income. In many cases your lawyer can make a motion to modify the confirmed plan. If you have less money to pay to the trustee, you can propose to lower the monthly payments.  You can also propose to lower the percentage being paid to the unsecured creditors, and to extend the duration of the plan to 60 months, if it not already a 60 month plan.

If you are proposing to lower your monthly payments, you will also have to submit a new budget (Schedules I & J). This amended budget must show that your current household income and expenses have decreased your disposable income to the amount you are proposing to pay in your modification.

There may be some limitation to how much you can lower your payments to the Trustee. Within the duration of the plan (which can be no more than 60 months), you must pay a certain minimum amount. You must fund in enough to pay all of the secured creditors scheduled to be paid in the plan, along with the appropriate interest.  You also must pay in full all priority debts, such as taxes or support arrears.  Also, your attorney must be paid any court approved remaining balance. The unsecured creditors also must be paid at least the percentage called for in the plan, as modified, unless you are in a jurisdiction that allows a “pot plan”.  So if your proposed modified plan does not pay enough during the plan period to cover all of that, the modification will not be approved by the Court.

Another factor that could prevent you from lowering your payments is the “liquidation test”, also called the “best interest of creditors test”. When you filed your bankruptcy petition, you listed all of your assets on Schedule A & B, with their values. You also listed which of your assets were fully or partially exempt on Schedule C. The “liquidation test” requires that the unsecured creditors receive an amount at least as much as your non-exempt assets. For instance, say at the time you filed your bankruptcy petition you had $2,000 of the value of your car over the amount you could exempt, plus some non-exempt property worth $5,000. In that case you would have to pay your unsecured creditors at least $7,000 through the life of the plan, regardless of the percentage of their total claims. So if your proposed modification pays less to the unsecured creditor than the liquidation test requires, it is likely to be denied.

Even if you find yourself between a rock (can’t afford the trustee payments) and a hard place (must pay an unaffordable amount to satisfy the plan), there may still be a way to modify your plan to decrease the monthly payments. Your modification can propose to lower payments for a while, and then increase the payments up the road, when your income goes back up. Or, you can modify to lower the payments and supplement those payments from other sources, such as future tax refunds, or bonuses, or the proceeds from the sale of some real or personal property.

You should always let your bankruptcy attorney know about changes in your circumstances, especially whenever you are concerned about your ability to continue making the payments to the trustee pursuant to your confirmed Chapter 13 bankruptcy plan.

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Peter Orville is a bankruptcy lawyer in Binghamton, located in the Southern Tier of New York. He is a member and New York co-chair of the National Association of Consumer Bankruptcy Attorneys.

Last modified: October 22, 2012