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What if I Can’t Fulfill the Repayment Plan Under Chapter 13?

EH Law Group April 9, 2024

Life is unpredictable, and sometimes despite our best efforts and intentions, we find ourselves grappling with financial hardships that can derail even the most meticulously planned budget. For individuals who are under a Chapter 13 bankruptcy repayment plan, the fear of not being able to meet the agreed-upon payments is a source of stressful uncertainty. If you find yourself in this situation, rest assured that all is not lost if you find yourself unable to keep up with Chapter 13 payments. From modifying your plan to converting to Chapter 7 bankruptcy, you may have options available. 

Understanding Chapter 13 Bankruptcy 

Chapter 13, commonly known as 'wage earner’s plan', allows individuals with a regular income to develop a plan to repay all or part of their debts. It typically spans three to five years and is suited for debtors who wish to keep certain secured assets, such as a car or a house, provided they can afford to pay for these assets over time. 

Common Reasons for Failure to Meet Repayment Plan 

It's not unusual for individuals with a payment plan under Chapter 13 bankruptcy to encounter difficulties fulfilling their repayment commitments. Here are some of the key factors that often lead to these financial roadblocks:

  • Unexpected Income Reductions. Whether through job loss, cutbacks, or reduced work hours, a sudden drop in income can derail one's ability to stick to the agreed-upon repayment plan. 

  • Health-Related Financial Shocks. Medical emergencies can impose significant unexpected expenses, straining one's budget and jeopardizing the repayment structure, especially without adequate health coverage. 

  • Life Alterations. Events such as divorce, the death of a close family member, or damage from natural disasters can not only take a toll emotionally but also financially, affecting one’s capacity to comply with the repayment schedule. 

Recognizing these potential hurdles is the first step toward addressing them. Don't hesitate to reach out for help if you find yourself in financial distress. It could be the wisest move you make to get out of the situation you're in.

Steps to Take if You Can't Fulfill the Repayment Plan 

The first and most crucial step if you anticipate difficulty with your Chapter 13 payments is to contact your bankruptcy attorney immediately. They are your most reliable resource for understanding and navigating the next steps you need to take. 

Once you contact your attorney, take a comprehensive look at your financial situation to understand the scope and nature of the changes that are affecting your ability to meet the repayment plan. This self-assessment will help your attorney in devising the best strategy moving forward and can also be insightful for you in terms of future financial planning. 

Legal Options Available 

Exploring the legal avenues available to you is smart when facing difficulties in fulfilling your Chapter 13 repayment plan commitments. Some of your options include modifications, being granted a hardship discharge, and converting to Chapter 7 bankruptcy. 

Modification of the Repayment Plan 

You must show a significant and lasting change in circumstances since the origination of the repayment plan. This can be a reduction in income, an increase in expenses due to unforeseen hardship, or a co-debtor's unexpected financial problems. 

You will need to file a motion with the bankruptcy court and provide evidence of the hardship. This could include pay stubs, unemployment benefits, medical bills, or any other relevant financial documentation. 

The court could approve a new, adjusted repayment plan based on the evidence provided. The new plan is designed to reflect your current financial situation and is typically not longer than the original plan, although it can lower monthly payments to an affordable level. 

Hardship Discharge 

A hardship discharge is a court-ordered release from your Chapter 13 plan if the initial plan was impossible to complete due to circumstances beyond your control. To be eligible, you must have already paid out as much under your plan as your creditors would have received had you filed for Chapter 7 bankruptcy. 

Similar to the process for a modified repayment plan, you’ll need to file a motion with the court, demonstrating that a serious and permanent change in your financial ability has occurred, making it impracticable for you to complete the plan. 

While a regular discharge effectively eliminates the remaining eligible debts, a hardship discharge does this while the case is ongoing and before the completion of payments in the original plan. 

Conversion to Chapter 7 Bankruptcy 

To convert your Chapter 13 bankruptcy to a Chapter 7, you must be eligible for Chapter 7 and not have received a discharge in a Chapter 7 case filed within the last eight years or a Chapter 13 case filed within the last six years. Some of the pros of converting include a faster process and potentially greater discharge of debts. However, Chapter 7 typically doesn't allow you to keep property that you're still paying for under your Chapter 13 plan. 

When you convert to Chapter 7, the assets in your Chapter 13 plan may need to be surrendered to the bankruptcy trustee for liquidation to satisfy your debts. Your dischargeable debts will be eliminated, provided they are not affected by the conversion rules. 

Consequences of Failing to Act 

If you fail to take proactive steps to address your repayment challenges, your bankruptcy trustee or creditors may seek a dismissal of your case. This can have severe financial and legal implications, leaving you more vulnerable to creditor actions and negating any protections granted under the bankruptcy filing. 

Preventive Measures and Financial Management 

When facing difficulties in meeting your Chapter 13 repayment plan, it’s crucial to adopt preventive measures and fine-tune your financial management strategies. Here are actionable steps to consider: 

  • Timely Communication: Contact your attorney and the bankruptcy court promptly to discuss any potential repayment issues. Open and honest dialogue can help in finding feasible solutions and demonstrate your commitment to resolving the problem. 

  • Budget Development: Craft a budget that accurately reflects your financial status post-hardship. Prioritize necessary expenses and reduce non-essential spending. Adhering to this budget can convey to the court and your creditors that you're making a genuine effort. 

  • Financial Goals Reassessment: Review and adjust your long-term financial plans to accommodate the changes in your circumstances. Setting realistic goals can aid in navigating through the current financial challenge and preparing a solid ground for future stability. 

Incorporating these steps not only aids in navigating through the immediate crisis but also sets a foundational framework for lasting financial health and resilience. 

Make the Choice That's Right for You 

Facing financial difficulties in the midst of Chapter 13 bankruptcy can be daunting, but it does not spell automatic failure. By understanding your legal options, seeking immediate counsel, and taking proactive steps, you can work toward achieving the fresh financial start that is the goal of any bankruptcy filing. EH Law Group stands by your side through every turn in the bankruptcy process, offering compassionate and experienced legal support. Remember, legal actions can have complex repercussions, so work with a skilled bankruptcy attorney who can guide you to the best possible outcome in your unique situation.