11 Dec When Bankruptcy Chapter 13 Plan Hits Trouble
Have the wheels come off your Chapter 13 bankruptcy plan?
All is not necessarily lost if you find you can’t make the monthly payment in a confirmed Chapter 13 case. There are several options to letting the bankruptcy case get dismissed for non payment.
The Bankruptcy Code allows a debtor to modify the terms of a plan or even to apply for a bankruptcy discharge without completing the promised payments.
One of the strengths of 13 is its flexibility. While requiring the debtor to make payments from future income, the Bankruptcy Code recognizes that things change. Section 1329 provides that payments to the plan may be increased or, more often, decreased. The duration of the plan can be shortened or lengthened (but not beyond five years).
Where I practice, in the Northern District of California, trustees will approve plans that suspend payments altogether for a short period, if the facts require. This can give a debtor a chance to find a new job or to recover from an unexpected expense.
When income drops and there is no expectation that the situation will improve quickly, a hardship discharge may be possible. The hardship bankruptcy discharge eliminates all debts except those that would have been non dischargeable in a Chapter 7.
The debtor needs to show that the inability to complete the plan is due to circumstances beyond his control and that creditors have received as much in distributions as they would have had the case been originally filed under Chapter 7.
Advantages over conversion to 7
In my view, bankruptcy’s hardship discharge has several advantages over converting a floundering Chapter 13 case to Chapter 7. By getting a hardship discharge, the debtor is eligible to file another Chapter 13 very soon, two years from the filing of the present case. So, where the payment plan was paying back nondischargeable taxes, the debtor is free to file another Chapter 13 as soon as the income situation improves.
Also, by getting a discharge in the Chapter 13, the debtor doesn’t have to attend another 341 meeting or amend the bankruptcy schedules.
Conversion to 7
The debtor can always convert a bankruptcy case to Chapter 7. It remains the same case, with an uninterrupted stay protecting the debtor from creditors. Conversion could be advantageous if the debtor has decided to surrender a house she was trying to save in 13; it might not be right if the choice of Chapter 13 was triggered by assets with more value than could be protected by available exemptions.
If there is a take-away from this article it is: get in touch with your attorney when you encounter trouble meeting the terms of your Chapter 13 plan. Don’t wait til the trustee files a motion to dismiss the case. Solutions are almost always easier to find and cheaper to implement when you are proactive.
Image courtesy of Robert Couse-Baker (Flickr)
Cathy Moran, Esq.
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