Sometimes a debtor loses income and cant complete a Chapter 13.   For instance what if a debtor contracts cancer, cant work and complete his Chapter 13 or needs time off from the payments. There are four options to prevent having your case tossed out because you are not making payments.

Modification of a Chapter 13 plan or order of confirmation

If the debtor’s income goes down a plan can be modified up or down or payments may be temporarily reduced. The Debtor is required to pay priority debts and secured debts in full in a Chapter 13. Prioirty debts are basically child support and income taxes less than 3 years old. The Chapter 13 Debtor must also repay what a Chapter 7 would have if any property of the debtor would have been sold in a Chapter 7. This creates a minimum amount a Chapter 13 must repay.  Normally modification is a short term temporary less than 3 month vacation from the plan that only effects the unsecured creditors without changing payments to secured creditors.

Plans can be modified to accommodate a temporary disability or problem. But if a plan can’t or won’t repay the minimum amount to cover priority and secured creditors the case will be dismissed.  If you really cant repay the debtor is normally better off eventually converting their case to a Chapter 7,

Modifying a plan or an early Chapter 13 discharge does not involve filing a second petition, documentation and a 341 meeting. Converting a case or dismissing an refiling a case involve filing all new schedules, additional filing fees, and a second attorney fee.  Modifying and early discharge are cheaper and easier procedures.

Chapter 13 Early discharge

A debtor can get an early discharge in a Chapter 13 if

  1. They cannot continue their payments
  2. They have substantially completed their plan
  3. Their Chapter 13 repaid as much as a Chapter 7 would
  4. The early discharge is not their own fault.

For instance if a Chapter 7 Trustee would have sold a 5,000 dollar auto if the case had been filed as a Chapter 7 the Chapter 13 must have paid what the 5,000 would have. Since the Chapter 7 trustee would have earned a 25% commission the Chapter 13 must have repaid 3750.  The 13 must also repay in full the secured and priority creditors.

A Chapter 13 debtor cannot get an early discharge if the debtor caused the problem. We are not talking about cancer being caused by a debtor choosing to smoke cigarettes or flooding after a debtor chose a home close to a river. In one California case the debtor murdered her husband and then wanted a hardship discharge since she couldn’t make the payments while she was in prison. That discharge was denied.

Conversion of a Chapter 13 to a Chapter 7

Refiling or Converting the case from a Chapter 13 to a Chapter 7 adds in any new debt the Debtor incurred during the Chapter 13 bankruptcy. Creditors that crop up after the case is filed are called gap creditors. Converting or refiling as a Chapter 7 allows a Debtor a second chance to discharge additional debts which happened after the Chapter 13 bankruptcy case was filed. In the case of people that have medical problems after the Chapter 13 is filed this is a major benefit. Medical problems are the major reason people can’t complete a Chapter 13.

Conversion preserves the benefit of when the case was filed. Some people may have to file a second case.   If you just convert the case to a Chapter 7, after being in a Chapter 13 for 4 years, then you have completed 4 of the 8 years before a second Chapter 7 can be filed. This may be a major benefit for a Debtor which may have to file a second bankruptcy case due to ongoing cancer related expenses.  Normally conversion is the way to go if you have not filed a Chapter 7 within 8 years of filing the Chapter 13 you normally want to convert.

Dismissing and Refiling from Chapter 13 to Chapter 7

If the Debtor filed a Chapter 7 within 8 years before the Chapter 13 was filed, the Debtor may not be able to convert the case to a Chapter 7.   This time period runs from the date the last Chapter 7 case was filed until the new Chapter 7 case is filed.  If a Chapter 7 was filed within 8 years before the 13, you cannot convert the Chapter 13 case to a Chapter 7.  If a Chapter 7 was filed within 8 years, you cannot convert.  You can only get an early discharge or dismiss and refile after the 8 year has gone by.

If a Chapter 13 case is dismissed and refiled, then other problems may occur. For instance, if the Chapter 13 case was attempting to strip a second mortgage you lose that benefit by dismissing a Chapter 13 and refiling as a Chapter 7. Only a Chapter 13 discharge will strip the second mortgage and you need the early discharge.

Dismissal and refiling as a Chapter 13 or 7 also runs the risk of not having an automatic stay when there are repeated filings. This 2005 rule prevents chain filing.  Special rules apply to this and there are risks.

The advantage to refiling is there may be debts left over from the cancer illness and it cures the time limitation conversion may have. Gap debts are added to the Chapter 7 if you dismiss and refile or if a Chapter 13 is converted. These medical debts can be discharged.   Of course a debtor still has to meet the requirements of a Chapter 7 such as passing the means test.

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