Sometimes a debtor loses income and can’t complete Chapter 13. For instance what if a debtor contracts cancer, can’t work and complete his Chapter 13, or needs time off from the payments. There are four options to prevent dismissal of your case because you don’t make payments. Here is a guideline for Chapter 13 modification, conversion, refiling, and early discharge.
Chapter 13 Modification, Conversion, Refiling and Early Discharge
⎆ 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 Chapter 13. Priority debts are basically child support and income taxes less than three years old. The Chapter 13 debtor must also repay what Chapter 7 would pay if any property of the debtor would be sold in Chapter 7. This creates the minimum amount that a Chapter 13 must repay.
Normally, modification is short-term, temporary, and less than three months’ vacation from the plan that only affects 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 they really can’t repay, the debtor is normally better off eventually converting their case to 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 and refiling a case involves filing all new schedules, additional filing fees, and a second attorney fee. Modifying and early discharge are cheaper and easier procedures.
⎆ Conversion of Chapter 13 to 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 Chapter 7 allows the debtor a second chance to discharge additional debts which happened after the Chapter 13 bankruptcy case filed. In the case of people that have medical problems after Chapter 13 is filed this is a major benefit. Interestingly, medical problems are the major reason people can’t complete 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 Chapter 7, after being in Chapter 13 for 4 years, then you complete four of the eight years before you file a second Chapter 7. This is a major benefit for a debtor that must file a second bankruptcy case due to ongoing cancer or other illness expenses. Normally, the conversion is the way to go if you have not filed a Chapter 7 within 8 years of filing Chapter 13 you want to convert.
⎆ The Time Periods Dismissing and Refiling from Chapter 13 to Chapter 7
If a debtor files a Chapter 7 within eight years before the Chapter 13 files, the Debtor might not be able to convert the case to Chapter 7. This time period runs from the date of the last Chapter 7 case files until the new Chapter 7 case files. If Chapter 7 files within 8 years before the Chapter 13 files, you cannot convert the 13 cases to a 7.
Again, if Chapter 7 files within 8 years, you cannot convert. You can only get an early discharge or dismiss and refile after the eight years is past.
If a Chapter 13 case dismisses and refiles, then other problems might occur. For instance, if the Chapter 13 case is 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 run the risk of not having an automatic stay when there are repeat filings. Of course, the
S.256 – Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) prevents chain filing.
The advantage to refiling is there may be debts from the cancer illness and it cures the time limitation for conversion. Gap debts will go to Chapter 7 if you dismiss and refile or if there is a Chapter 13 conversion. In addition, medical debts might be dischargeable. Of course, a debtor still has to meet the requirements of Chapter 7 such as passing the means test.
⎆ Chapter 13 Early Discharge
A debtor might get an early discharge in Chapter 13 if one or more of the following is true:
- They cannot continue their payments.
- They have substantially completed their plan.
- Chapter 13 repaid as much as Chapter 7 would.
- The early discharge is not their own fault.
For instance, if a case files as Chapter 7, the trustee earns a 25% commission if an auto sells for $5,000. In a Chapter 13 discharge, you must show payment of $3,750 and it must also show that the trustee gets the same amount as if the filing was in Chapter 7. The Chapter 13 filing must also show repayment in full to all secured and priority creditors.
Additionally, a Chapter 13 debtor cannot get an early discharge if the debtor causes the problem. 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. So, this isn’t about a debtor who chooses to smoke and then gets cancer or if a debtor chooses a home close to a river and then it floods.
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If you are thinking about filing bankruptcy, don’t delay because timing is crucial. I am here to help you. So, contact my office right away to start the conversation. Nick C. Thompson, Bankruptcy Lawyer: 502-625-0905.