Sometimes circumstances change, and making Chapter 13 payments gets almost as difficult as keeping up with all the debts that drive a borrower to seek a bankruptcy attorney in the first place. Yet you have other choices than defaulting on the plan.
Here’s what you need to know about modifying your plan.
There must be a change in circumstances that were beyond your control and were not your fault. Circumstances could include:
- A job loss
- A reduction in salary
- An illness
- An emergency
You can’t have caused the change in circumstance yourself. For example, you can’t just quit your job, decide to pursue a degree, and lower your income and expect the courts to change your Chapter 13 plan.
Priority Debts vs. Nonpriority Debts
Before modifying your plan, you should understand that your plan consists of both priority and nonpriority debts, as well as secured and unsecured debts.
Priority debts are unsecured debts that the courts classify as being more important than the other debts in your plan. These include:
- Wages, salaries, commissions, and contributions to employee benefit plans.
- Debts owed to farmers or fishermen.
- Alimony and child support.
- Recent tax debts.
- Customs, duties, and penalties owed to a government entity.
- Personal injury debts.
All other debts are called “nonpriority” debts.
This is important because a modified Chapter 13 plan must still allow you to pay all priority debts. It cannot drop too low to pay these debts, or the courts will not allow the modification to be made.
Consequences of a Modification
Most people go into Chapter 13 bankruptcy to protect homes and cars. Secured debts get paid even before priority debts do, so if you modify your plan you may not be able to pay these debts either. It is possible you might not be able to keep the property.
This may require you to move out of your home, allowing the trustee to sell it so that they can apply that balance to the balance on your bankruptcy plan.
If a modification isn’t a good option a 90 day moratorium can sometimes give you enough time to replace a lost job or to get disability payments flowing. This is essentially just a short forbearance that does not change the terms of your plan.
You’ll still have the same number of payments to make, and your payments will be exactly the same…but you can often buy time this way. The moratorium must not prevent you from paying off your Chapter 13 bankruptcy within the five years allowed by federal law
Conversion vs. Modification
Sometimes it no longer makes sense to attempt to make payments under a Chapter 13 plan, especially if you are going to have to give up property anyway. If you can now pass the means test, it may simply be wiser to convert to a Chapter 7 bankruptcy.
You will be allowed to keep any assets that are fully exempt under either the New York exemptions or the federal ones.
Sometimes your circumstances change when you are nearly done with the Chapter 13 plan. If you’ve already paid in at least as much as your creditors would have gotten under Chapter 7 then the courts may consider a hardship discharge.
If modification of your plan isn’t feasible, the courts might discharge your case then and there, but there are still consequences. For example if you’ll still have past-due secured debts after the hardship discharge, you can still lose the attached property.
You need a bankruptcy lawyer!
Filing Chapter 13 successfully is almost impossible without a bankruptcy attorney, and making modifications of any kind is harder still. Make sure you have an experienced attorney you can trust.
Considering bankruptcy? Contact our office to schedule a free consultation today.
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