Chapter 13 Modification, Conversion, Refiling, and Early Discharge
Sometimes a debtor loses income and can’t complete their Chapter 13 plan payments. For instance, what if a debtor is diagnosed with cancer and can’t work and complete Chapter 13? He may need time off from the payments. Four options prevent you from losing the benefits of a fresh start because you can’t make Chapter 13 plan payments. Here is a guideline for Chapter 13 when circumstances make Chapter 13 plan payments hard or impossible.
Your Four Chapter 13 Plan Modification or Conversion Choice
You can:
- Modify your plan
- Convert to a Chapter 7 and have no payments if you did not have a Chapter 7 discharge within eight years before you filed Chapter 13.
- Refile as a new Chapter 7 or Chapter 13. There are rules you have to use for repeat filings. For persons who have filed a Chapter 7 within eight years before filing Chapter 13, you may have to dismiss and then refile.
- Apply for an early discharge if you have paid most of the plan, you were not at fault for losing income, and the plan has repaid what Chapter 7 would have repaid.
Modification of a Chapter 13 Plan or Order of Confirmation
If the Debtor’s income goes down, a plan or order of confirmation can be modified up or down, or payments may be temporarily reduced. The Debtor is required to pay priority debts and catch up on secured debts in full in Chapter 13. But what unsecured creditors receive may be from 100% to 0%. Bankruptcy law allows the plan payments to increase with income, decrease, or be suspended. The bankruptcy code says it must be the Debtor’s best effort, and it must be feasible.
Feasibility and Getting Bankruptcy Court Approval for Modification
When you file the motion for approval of a plan payment modification, it is helpful to the court and trustee to attach a short budget and proof of income to show the need for a bankruptcy judge. To modify your plan, it must meet the test for the plan still be feasible.
- Priority debts are child support and income taxes less than three years old. These must be paid up to date by the end of the plan.
- The Chapter 13 debtor must also repay what Chapter 7 would pay if any property of the Debtor would be sold in Chapter 7.
- Secured debts must also be paid for past due payments by the plan’s conclusion. Any default must be cured.
This creates the minimum amount that Chapter 13 must repay. You must keep these rules in mind, or at least your attorney has to when he modifies the plan payments. If you don’t, you will not get the discharge at the end of the plan, or the motion will be denied.
Modify Your Payment Plans for the Short Term
Usually, modification is short-term and temporary. It is generally for less than three months of relief from the plan payments. It only affects unsecured debts without changing payments to secured creditors. Remember, unsecured claims can be paid a lower percentage of their claims to make the plan feasible.
Bankruptcy Relief When a Repayment Plan is Unaffordable
Plans can be modified to accommodate a temporary disability or problem. But the case will be dismissed if a plan can’t or won’t repay the minimum amount to cover priority and secured creditors.
If a debtor can’t repay, the Debtor usually is better off eventually converting the Chapter 13 case to Chapter 7. This is true even if the circumstances were that Chapter 13 was filed to repay mortgage arrears and to save a home. Filing a case can give a client time to sell a home, obtains a mortgage modification, or find other solutions.
If you can’t modify the plan payments after confirmation, convert to Chapter 7, file a new Chapter 7 or Chapter 13 case, or dismiss the case and file later. Circumstances change. If this is a long-term condition and none of these options are possible, file a new Chapter 13 later when you can afford it.
Conversion of Chapter 13 to Chapter 7
Refiling or Converting the case from Chapter 13 to Chapter 7 can add in any new debt the Debtor incurred during the Chapter 13 bankruptcy. Creditors that crop up after the case filing are called gap creditors. Converting or refiling as Chapter 7 allows the Debtor a second chance to discharge additional debts.
Debts incurred after the Chapter 13 bankruptcy case was filed can also be included in a new case. In the case of people that have medical problems after Chapter 13 is filed, this is a significant benefit. Medical problems are the primary reason people can’t complete Chapter 13. Medical debts are indeed included in a second case.
The Eight-year Rule for Conversion of a Confirmed Modification Plan
Modification lawyers know the Bankruptcy court makes you wait eight years after filing the first Chapter 7 case before you can file a second case and get a second Chapter 7 discharge.
If you filed a Chapter 13 only six years after Chapter 7, you could not just convert. If it has not been eight years since the filing of the prior Chapter 7 case, you cannot convert the second case and get a Chapter 7 discharge. Instead, if you have been in Chapter 13 for two years, you can now dismiss and file a new Chapter 7 case. It has been eight years since you filed the last Chapter 7 and obtained the discharge.
The new bankruptcy case complies with the rule, and the unsecured creditors can be discharged. You will need to pay for the new case, but you no longer have a plan payment.
Dismissing and Refiling as a Chapter 13
Other problems might occur if a Chapter 13 case dismisses and refiled as a new Chapter 13 or 7. For instance, if the Chapter 13 case attempts to strip a second mortgage, you lose that benefit by dismissing Chapter 13 and refiling it as 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. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) prevents chain filing one case after another. If you dismiss a case after a motion for relief from stay has been filed, there is no automatic stay if you refile within 180 days. If you dismiss two cases within a year, there is no automatic stay to prevent a foreclosure period.
What are the Acceptable Reasons for Missed Payments?
Often the Debtor has suffered a personal injury or has lost a job. But it can also be that health insurance has increased or tax returns and the IRS has taken up the income. People often end up with expenses being left out of the budget the court confirms, and a modified plan may or may not fix. If you have temporarily lost your regular income, an amended plan can give you the time off and the necessary modification.
The advantage to refiling is there may be, after filing, debts you can now include, and it can cure the time limitation a conversion can have. These “gap” debts will go into Chapter 7 if you dismiss and refile or if there is a Chapter 13 conversion. Of course, a debtor still has to meet the requirements of Chapter 7, such as passing the means test. But if you have been off work, the means test for a Chapter 7 or an early discharge should be easy.
Considerations for a Chapter 13 Early Discharge
A debtor might get an early discharge in Chapter 13 if the following is true:
1) They Cannot Continue Their Payments
To get an early discharge, you have to qualify as unable to make the Chapter 13 payments. Often just submitting a budget will prove something more than a simple plan modification is needed. Your budget should show you cannot make the car loan and rent payments or buy health insurance plus make plan payments.
2) They Have Substantially Completed Their Plan
A debtor who has recently filed typically will not qualify for an early Chapter 13 discharge. He has not yet made an effort to deal with repaying the unsecured creditors for any length of time. The hardship discharge is reserved for when a debtor files a plan and has made substantial compliance. I would interpret that as the Debtor has made at least half the plan. However, if the Debtor has become permanently disabled, he may qualify.
3) Chapter 13 Repaid as Much as Chapter 7 would
If unsecured creditors would have gotten back 10% in Chapter 7, then at the time of a hardship discharge, Chapter 13 must have repaid at least 10%. The bankruptcy court gives you a Chapter 13 discharge for what Chapter 7 would have paid debt under the bankruptcy code. Here is a prime example:
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 a 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 should also show a repayment that catches up any default to the secured and priority creditors. Some districts or judges may gloss over this and not require it. However, the mortgage company can foreclose if the case grants the hardship discharge and the mortgage has not caught up.
4) The Hardship Discharge is Not the Debtors Fault
A California case best explains this rule when a woman murdered her husband. She asked for a hardship discharge in bankruptcy court. You can not intentionally cause your problem and then complain about it even if you live in California and can’t make payments while in prison. The bankruptcy judge denied that hardship discharge which is for a deserving debtor.
The hardship discharge is allowed for accidents. You will not be denied if you are fired from your job or if you choose a home close to a river and it floods. If you quit your job, you can’t complain. You can’t pay priority claims, unsecured debt, and domestic support obligations.
Contact Us About the Chapter 13 Modification Plan
The attorney-client relationship is essential in our office. We are here to listen and offer logical advice to clients to cure problems with creditors. A Chapter 13 bankruptcy case allows you to manage priority claims and secured creditors much better than a 7. The Chapter 13 plan payments, however, must be affordable. A Chapter 13 plan should be calculated correctly to include all the expenses and even allow for unforeseen circumstances.
Modification lawyers are a debt relief agency by an Act of Congress and have been since 2005. A Debtor files when property and their paycheck become at risk. If people file at the last moment, the property or debts become more difficult to cure with Chapter 13 bankruptcy. Come in early for your free consultation, or research our website and manual to understand the process. Call 502-625-0905
Louisville, Kentucky Bankruptcy Forms
Chapter 13 Plan Modifications in Louisville, Kentucky • Video
Mortgage Modifications • Foreclosure Failures
Convert from One Bankruptcy Chapter to Another
Voluntarily Dismissing a Chapter 13 109(g)(2) and Refiling • Video
Chapter 13 Hardship Discharges in Bankruptcy
If you are considering 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.