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If your Chapter 13 payments are too high, you have options. The preferred option is modifying the Chapter 13 plan payment. This article explains the requirements for a Chapter 13 plan modification and the options if you can't meet them.
When you start a Chapter 13 case, you file your proposed Chapter 13 plan and other bankruptcy paperwork and documents. If no one objects to the plan or all objections get resolved, the court will "confirm" or finalize it.
From then on, you must make timely plan payments until you complete the plan. If you can't, the court will dismiss your bankruptcy case.
Sometimes, everything doesn't go as planned, and your income drops, making it impossible to pay your plan payments. For instance, many people can't continue with Chapter 13 after losing a job, getting sick, filing for divorce, or incurring an unexpected expense like a major car repair.
In these instances, your bankruptcy attorney might suggest that you modify your plan to catch up on your payments.
You can modify your plan both before and after confirmation.
You must pay particular debts in your Chapter 13 plan, including some taxes and all domestic support obligations known as "priority debts," as well as any mortgage arrears on properties you wish to keep. Filers with this kind of debt often run into problems when attempting a modification. Here's why.
If your plan payment amount was sufficient to pay off required debts, then you probably won't be able to reduce your plan payment unless you give up a property on which you were paying arrears. However, if your previous plan paid a percentage to your nonpriority unsecured creditors, such as credit cards, medical bills, and other debts that qualify for discharge, you can reduce your plan payment by reducing or eliminating the portion going to these creditors.
If you can't complete your plan payments and a modification isn't possible, you might want to convert your case to a Chapter 7 bankruptcy. However, you could lose property if you filed for Chapter 13 to save property you would have lost in Chapter 7. Another option is to request a "hardship discharge" by filing a motion with the bankruptcy court.
Before receiving a hardship discharge, you must convince the bankruptcy judge that you suffer from more than a temporary job loss or disability. Qualifying for a hardship discharge requires you to show that your circumstances will likely be permanent, meaning that you probably won't be able to make your Chapter 13 plan payments before your plan term ends.
Also, you'll have to meet the "best interests of creditors" test by showing that you've paid your unsecured creditors at least as much as they would have received had you filed a Chapter 7 case.
Example: When Ashley filed her Chapter 13 case, she had company stock worth $10,000, but no exemption to cover it. Therefore, before she could get a hardship discharge, her Chapter 13 plan payments needed to be enough to pay unsecured creditor claims at least $10,000 total. Three years into her plan, she suffered an accident. At that point, the trustee was still paying secured claims, like her mortgage arrearages and car loan, and hadn't paid anything to unsecured creditors yet. Barbara wouldn't qualify for a hardship discharge because she hadn't paid anything toward the necessary $10,000.
A hardship discharge isn't as broad as a regular Chapter 13 or Chapter 7 discharge. Although most general unsecured debts get eliminated, you'll likely remain liable for other claims, including: