Under a Chapter 13 repayment plan, you make regular payments to the bankruptcy trustee over three to five years. This enables you to satisfy your creditors over time and, in most cases, keep everything you own. Missing payments or making late payments can result in the dismissal of your case and loss of bankruptcy court protection. If circumstances cause you to fall behind or make your payments late, you can take steps to make it less likely that your case will be dismissed.
The effect of an order dismissing your Chapter 13 case can be devastating. Under Chapter 13, you can use the bankruptcy laws to remove a second mortgage from your home or reduce a mortgage on a rental property, thereby lowering your monthly payments on these obligations. You can also remove liens from your property and reduce or stretch out payments on car loans. Dismissal or conversion to Chapter 7 will undo these benefits. Your payments will return to pre-bankruptcy levels, or they may increase if additional interest accrued during the failed Chapter 13. Creditors can resume collection activity, including foreclosure, repossession, lawsuits and garnishment. You may need to make some changes to avoid this situation.
You can have Chapter 13 payments made via income deductions. Under an income deduction order, your employer is required to deduct your payment from your paycheck and submit it to the trustee. This helps keep payments timely and ensures that you will not find yourself short when payment is due. Unlike garnishments, Chapter 13 income deductions are considered voluntary. If you are under an income deduction order and your employer is not submitting payments on time, you can prevent your case from dismissal by providing the trustee with pay stubs to show that the funds are being properly deducted. If you are not under an income deduction order and your payments are falling behind, you may be able to avoid dismissal by agreeing to begin income deductions.
Making late payments to the trustee may be a sign that you are not able to afford to continue under your current plan. If your financial circumstances have changed, it may be possible to modify the terms of your plan. Modification is not required when your income decreases or your expenses increase, but it may be necessary to prevent your case from dismissal. Plan modification can also help you catch up on your payments if you have fallen behind -- even if your overall financial circumstances have not changed. To modify, you will need to file a motion with the court explaining your circumstances and provide a copy of your proposed modified plan. Creditors have a new time period to object. Your modified plan must comply with the law and only goes into effect if the court approves it.
If you find yourself in an especially dire situation, it may be possible to obtain a hardship discharge without completing your Chapter 13 plan. To be eligible, the failure to complete your plan must be due to circumstances that cannot fairly be considered your fault, the situation cannot be fixed by a plan modification, and your creditors have already received at least as much as they would have received if you had filed a Chapter 7 rather than Chapter 13. Hardship discharges are, however, difficult to obtain and, like dismissal and conversion to Chapter 7, are unlikely to preserve mortgage benefits gained through Chapter 13. They may also provide less protection than a Chapter 7 discharge in that your personal obligation on secured debt, including mortgages, may not be discharged (depending on the terms of your confirmed plan). Under these circumstances, converting your case to Chapter 7 may be the better option. It is best to consult an attorney for a complete review.
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