When you file for Chapter 13 bankruptcy, you commit to a plan for repayment of your creditors that is overseen by a court-appointed trustee. Most remaining debts are wiped away by the court once you successfully complete the repayment plan. Although the plan is scheduled by the court for three or five years, there is flexibility to alter its terms if you incur substantial changes to your financial circumstances.
After your Chapter 13 bankruptcy petition is filed, you are required to submit a proposed repayment plan listing a schedule of your monthly earnings and expenses. After reviewing your submission, the court determines how much of your earnings is classified as "disposable income" which must be paid each month to your creditors for the duration of the plan. A court-appointed trustee who administers your payments is responsible for ensuring you meet your repayment obligations. Failure to make all payments on time may be grounds for the court to dismiss your bankruptcy without discharging your debts.
Interests of the Debtor
Although the bankruptcy process may seem formidable, one role of the court is to look out for your interests as a debtor. The goal of the Chapter 13 process is to ensure that there is fair and equitable treatment for both you and your lenders. Since the law recognizes that your family and employment situation may change over the 36 or 60 months of your repayment plan, the court will allow flexibility to accommodate changes in your circumstances.
Reasons for Plan Changes
If you incur a reduction in income due to a period of unemployment or demotion, you may qualify for a hardship alteration in your plan. Similarly, if you have an unexpected increase in your necessary living expenses, such as the birth of a child or emergency medical treatment, then the court may grant changes in your repayment terms. You should notify your attorney, or the court and trustee directly if you are unrepresented by counsel, of any changes in your circumstances as soon as possible.
If you are able to demonstrate a good reason for altering your plan, then the court may allow one of three adjustments to your repayment schedule. First, the court may simply allow you to reduce the amount you pay each month to your creditors. The court would reason that since you have less disposable income, you have less to provide your creditors. The court may also allow you to suspend your plan payments for a few months if it appears that your reduced income or increased expenses are only temporary. Finally, if you are on a three-year repayment plan, the court may extend the repayment period for additional months up to five years.
Chapter 13 bankruptcy requires you to pay at least as much to your unsecured creditors as they would have received if you had filed for Chapter 7 bankruptcy. Under Chapter 7, any property that is not protected by law through an exemption is seized by the trustee and sold at auction to benefit your creditors. In a Chapter 13 case, the court determines how much you would have forfeited to your lenders had you filed Chapter 7, and then sets a bare minimum that your unsecured creditors would receive. This means that if you are to reduce your monthly payments due to a hardship, your lenders will still need to be paid this minimum amount after the plan is modified. If circumstances are so dire that it is otherwise unfair for you to continue in the bankruptcy plan, but you have met the minimum payment obligations, then the court may grant a hardship discharge relieving you of your remaining debts.