A Chapter 13 repayment plan allows you the opportunity to pay certain creditors back over the course of three to five years. A Chapter 13 plan typically lasts five years to provide the lowest plan payment possible. A frequent question clients wonder about is what would happen if they were to experience a significant hardship during a Chapter 13? For example, what if they lost their job or lost their spouse due to death or divorce? Sometimes clients wonder if they can be prosecuted legally for not meeting their obligations under a Chapter 13. The good news is that a Chapter 13 is not set in stone; you will not be “in contempt of court” if you cannot complete your plan, and often it is still possible to receive a discharge on your debt.
Your Chapter 13 attorney remains your attorney for the length of the plan, so whenever you have a significant change in your income and/or expenses, you should contact her as soon as possible. The most frequent issue is temporary or permanent job loss. There are a couple of options available in that case:
- You may be able to get a “suspension” in your plan payments for up to three months. This is a good option when you know you expect to either begin receiving unemployment benefits or find a new job within a few months; or, when you know you will only be off work for brief period due to a temporary layoff or medical issue.
- You may be able to temporarily reduce your plan payments to an extremely low payment for three to 12 months, knowing you will have to raise them later. This is recommended when you are paying for secured debt, such as a vehicle, through your plan. That way your vehicle lien holder receives at least a partial payment and isn’t tempted to file an objection or ask the Court for permission to repossess.
- You may be able to reduce your payments permanently if you know the loss of income will last for a long period of time. This is the best option when you are paying for a vehicle or other secured debt through the plan, or you have non-dischargeable priority debt such as back taxes or child support.
What if your change in circumstances is so severe that you cannot afford a plan payment at all? For example, what if you have retired or you have lost your spouse due to death or divorce? In that situation, it may make sense to get out of your Chapter 13 plan altogether by voluntarily dismissing the case, converting it to a Chapter 7 if you are eligible, or asking the Court for a “hardship” discharge. You may risk the loss of a home or vehicle if you were paying for mortgage arrears or a vehicle through your Chapter 13 plan, so be sure to discuss your situation with your attorney before making any decisions.
Don’t let fear of the unknown stop you from taking advantage of Chapter 13 relief. If you are contemplating filing for bankruptcy and think Chapter 13 might be the right choice for you but are uncertain about the future, talk to an attorney so that you can make an informed decision.
