What Happens if You Can’t Make Repayments in a Chapter 13 Plan?

There are a variety of reasons that debtors choose Chapter 13 bankruptcy over Chapter 7. Some have debts that can only be discharged in Chapter 13 bankruptcy. Others prefer Chapter 13 because it allows them retain more of their assets while going through the bankruptcy process. Some debtors would like to file for Chapter 7 bankruptcy but simply do not qualify and are forced to go through Chapter 13.

The core of Chapter 13 bankruptcy is to come up with a repayment plan that allows you to pay off as much debt as possible over the course of three-to-five years before discharging must of the remainder. But of course the problem for many debtors is coming up with the money to continually make those payments. And in the case of a job loss or serious illness, keeping up with a repayment plan can be nearly impossible. However, there are still some options for dealing with this situation.

Modifying a Chapter 13 Bankruptcy Plan

Chapter 13 bankruptcy plans are not written in stone. A debtor may modify a plan with good cause. This requires filing a plan modification with the bankruptcy court. Such a plan must include the reason the modification is being sought, and any supporting documentation, such as a termination letter in the event of a job loss, or medical bills in the case of an illness. The debtor also must file amended schedules for income and expenses.

Once the plan modification is filed, the bankruptcy trustee and any debtors who are a party to the plan can file objections. If no objections are raised, the judge will likely approve the modified plan. However, if debtors will not go along with the plan, the judge will have to make a ruling on whether to grant the modification.

Converting from a Chapter 13 Plan to Chapter 7 Bankruptcy

If modification of a Chapter 13 plan isn’t feasible, a debtor may be eligible to convert to a Chapter 7 bankruptcy plan. This is as simple as filing a Notice of Conversion, but the conversion must also be approved by the judge. If the debtor has filed for Chapter 7 bankruptcy within the previous eight years, he or she will not be eligible to convert to Chapter 7 bankruptcy.

Courts are also split on whether conversions must all go through the means test that prevents many debtors from initially filing for Chapter 7 bankruptcy, as this is not explicitly spelled out in the bankruptcy code. Some courts will still invoke this test in determining whether conversion to a Chapter 7 plan is appropriate. If a debtor can’t past the means test while seeking conversion, a court will rule that the Chapter 13 plan will stay in place. Other courts will not institute the means test before allowing a conversion.

The downside of conversion is that it’s almost like starting the entire bankruptcy process all over again. In addition to filing amended schedules for income and expenses, there will also be a new meeting of the creditors. Some property that a debtor is able to keep in Chapter 13 bankruptcy, such as a home or car, may also be sold by the new trustee in a Chapter 7 case.

Dismissing a Chapter 13 Bankruptcy Case

In the most extreme cases, if a court will approve neither modification or conversion, a debtor’s only choice may be to dismiss the initial Chapter 13 petition to end the bankruptcy proceedings. This of course ends any obligation under a repayment plan, but the biggest problem is that it does nothing to protect the debtor’s property from repossession. Creditors will be free to pursue the debtor in court, and they may be unwilling to negotiate.

However, the good news is that dismissing a Chapter 13 petition is rarely the only course of action if a debtor is having trouble with a repayment plan, as an experienced bankruptcy attorney can usually assist in modifying or converting a Chapter 13 bankruptcy case.

Thinking About Filing for Bankruptcy?

If you’re filing for bankruptcy or need to modify a Chapter 13 repayment plan, a bankruptcy attorney can help. The Law Offices of Melanie Tavare of San Francisco can assist you in reducing or eliminating debt through Chapter 7 or Chapter 13 bankruptcy. Contact the Law Offices of Melanie Tavare at 510-255-4636 or online.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.