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Upon commencement of a Chapter 13 bankruptcy case, the debtor files a Chapter 13 plan with the Bankruptcy Court. A Chapter 13 plan is a means by which a debtor in bankruptcy can repay some, or all of, his or her debts, while under the protection of the Bankruptcy Court. A Chapter 13 plan provides for monthly payments to a Chapter 13 trustee, who then distributes the money to the debtor’s creditors.
A Chapter 13 plan may be modified by the debtor at any time prior to confirmation of the plan. Confirmation means that the Chapter 13 plan has been approved by the Bankruptcy Court. Once a debtor’s Chapter 13 plan has been confirmed, the provisions of the plan must be adhered to by the debtor and all creditors.
What happens, however, when a debtor in a Chapter 13 case can no longer afford the monthly payments that must be made under the Chapter 13 plan? The Bankruptcy Code provides three remedies for such a situation:
Bankruptcy Code § 1329 provides for modification of a Chapter 13 plan. A modification can:
The modification can come at the request of the debtor, the trustee, or the holder of an unsecured claim.
The debtor may file a motion to reduce the Chapter 13 plan payments, if the debtor has had an unanticipated change in income or expenses. For instance, the debtor may have experienced a substantial reduction in income, due to loss of employment, or a new job with lower pay; or an unforeseen increase in expenses, such as for medical expenses. The modified plan must, however, comply with the requirements of Chapter 13, i.e. priority claims must be paid in full, and unsecured creditors must be paid at least what they would have received in Chapter 7.
Keep in mind that debtors in Chapter 13, who are repaying less than one hundred percent of their unsecured debt, must provide the Chapter 13 trustee with copies of their tax returns each year. If the debtor has had a significant increase in income, the Chapter 13 trustee may move to increase the debtor’s plan payments.
If modification of the Chapter 13 plan would not be practical, i.e., the debtor cannot afford to make even a small plan payment, then the debtor may request what is known as a “hardship discharge”, pursuant to 11 U.S.C. § 1328(b). To be eligible for a hardship discharge, the debtor’s inability to complete the plan payments must be due to “circumstances for which the debtor should not be justly held accountable.” Generally, this means that the debtor is no longer capable of working, usually due to unexpected illness or injury.
A debtor may receive a hardship discharge only if the amount already paid to unsecured creditors through the Chapter 13 plan is not less than the amount that they would have received had the debtor filed a Chapter 7 bankruptcy. This requirement will only apply if the debtor owned, at the time of filing for Chapter 13, non-exempt assets that could have been sold to pay unsecured creditors.
The discharge received under § 1328(b) is similar to a Chapter 7 discharge. That is, the debtor may only discharge debts that are dischargeable in Chapter 7, as opposed to the broader array of debts that may be discharged in Chapter 13. Click here for a list of debts that are dischargeable only in Chapter 13.
The final option available to debtors who cannot complete their Chapter 13 plan payments is to convert the case to Chapter 7. Conversion to Chapter 7 will generally make sense only if the reason for initially filing for Chapter 13 no longer exists. For instance, a debtor may have filed for Chapter 13 primarily to save their home from foreclosure (by repaying mortgage arrears through the Chapter 13 plan). If the debtor decides that they no longer wish to keep their home, or simply cannot afford to repay the mortgage arrears, then conversion to Chapter 7 should be considered. In this situation, the debtor can convert the case to Chapter 7 and obtain a discharge on their debts. However, a foreclosure action may then be started, or resumed, upon entry of the discharge.
A debtor always has the right to convert a case from Chapter 13 to Chapter 7. However, if a debtor who was ineligible for Chapter 7, due to inability to pass the means test, converts a case from Chapter 13 to Chapter 7, the case would be subject to dismissal. The end result is that conversion to Chapter 7 is not available to debtors that could not pass the Chapter 7 means test on the date that the case was originally filed. Click here for more information on the Chapter 7 means test.
Debts incurred after the filing of the Chapter 13 case, and before conversion to Chapter 7, are included in the Chapter 7 discharge (assuming that the debts are dischargeable in Chapter 7). For example, if the debtor incurred medical debts after the Chapter 13 filing date, but before the conversion date, these debts can be discharged upon conversion to Chapter 7.
If you are considering filing for bankruptcy under Chapter 13, it is important to consult with an experienced bankruptcy attorney. Andrew M. Doktofsky will review your options with you to determine how best to proceed. Call (631) 673-9600 to schedule a free consultation.
Andrew M. Doktofsky serves clients throughout Long Island, including Huntington, Lindenhurst, Hempstead, Hauppauge, Deer Park, Babylon, West Islip, and elsewhere in Suffolk County and Nassau County.