Defaulting on Chapter 13

By Beverly Bird

Chapter 13 is called a wage earner's bankruptcy for a reason -- you need enough disposable income each month after paying your living expenses to fund a repayment plan through the bankruptcy trustee. You must give him your extra money each month for three to five years, and he apportions it among your creditors. In exchange, your property is not subject to liquidation. If you fail to make your payments to the trustee, however, you could find yourself right back in the situation you were in before you filed for bankruptcy protection.

Catching Up

Your bankruptcy trustee doesn't have the authority to let you miss a few payments if you lose your job or otherwise suffer a hardship that makes it impossible for you to keep up with your Chapter 13 plan. He's not likely to take action against you within just a few days of a missed payment, however. In fact, it may take considerably longer than this. Therefore, if your setback is temporary and if you can come up with the money, you should have a little time to make a lump sum payment to catch up your arrears. You must resume making your regular installments to the trustee as well. It's possible that your Chapter 13 plan will proceed as though you never missed a step.

Modifying Your Plan

If you can't come up with the money to catch up with your arrears, you may be able to avoid defaulting by filing a motion with the bankruptcy court to suspend your payments for a period of time. This might be an option, for example, if you've been laid off but you think you'll return to work in a few months. You may need the trustee's consent. You can also file a motion to modify your plan if you think your change of circumstances is more permanent. The judge might agree to restructure your plan to lower your payments.

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Trustee's Motion to Dismiss

If you’re in danger of defaulting on your plan, the worst thing you can do is to do nothing. You'll eventually receive a letter from the trustee, notifying you that you're delinquent, then – if you still do nothing – he will file a motion with the court to dismiss your case. You'll receive a copy of the motion, requiring you to appear in court, where the trustee will ask the judge to terminate your Chapter 13 plan.

Options After Dismissal

If your case is dismissed, you're back to square one. The automatic stay that prevented creditors from harassing you for payment is lifted, and they can resume collection efforts. If you were in danger of foreclosure or having your auto repossessed prior to filing for bankruptcy, your creditors can pick up where they left off with these proceedings. You have a couple of options, however. You can file for Chapter 13 again, but you may have to wait 180 days if the court determines your default was intentional, and not due to circumstances beyond your control. If your income has changed dramatically, you might want to talk to an attorney about filing for Chapter 7 instead. You must pass a means test to qualify proving that you have insufficient income to pay your debts, and the trustee will sell your non-exempt property to give your creditors as much money as possible. However, the balance of your debts is then erased without any income contribution from you.

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