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Modifying a Repayment Plan Under Chapter 13

Life is full of surprises, and you never know when the plot of your personal story will take an unexpected turn. While some plot twists are welcome and wonderful, others are more challenging and can have a significant impact on your financial situation.

Events like serious injuries, job losses, medical emergencies, or other unpredictables can make it difficult to keep up with your financial goals. This can be especially frustrating after you've been putting in the time and effort to get your finances in order through bankruptcy or other debt-relief programs.

Thankfully, it's entirely possible to modify your Chapter 13 payment plan. But before we dive into the specifics, let's briefly review what Chapter 13 bankruptcy is and how it works.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy, often referred to as a wage earner's plan, allows individuals with a regular income to develop a plan to repay all or part of their debts. While it's the less popular personal bankruptcy choice than Chapter 7, those who are eligible for Chapter 13 may find it more favorable for a variety of reasons.

One of the foremost benefits of Chapter 13 is the ability to save one's home from foreclosure. It also offers individuals the opportunity to reschedule secured debts and propose a repayment plan that makes installments to creditors over three to five years. It essentially acts as a consolidated loan, offering a structured path to financial recovery.

Reasons to Modify Your Chapter 13 Plan

Reasons to seek modification of a Chapter 13 repayment plan are as varied as the borrowers themselves. Understanding the legitimate grounds for modification is crucial for a debtor considering adjusting their payment structure. Let's explore some of the common scenarios that warrant payment plan updates:

Pay Cut or Decrease in Income

This could be due to a job loss, a reduction in salary, or fewer opportunities for overtime work. A lowered income may affect your ability to meet the initially agreed-upon payment amount, necessitating a plan modification to accurately reflect your current financial abilities and ensure payments remain manageable.

Increase in Living Expenses

An increase in living expenses, such as increased insurance rates, necessary home repairs, or a spike in utility costs, can also be grounds for altering your repayment plan. These expenses may not have been anticipated when you first formulated your payment strategy, and without modification, they could place undue strain on your budget, making it challenging to adhere to the original plan.

Additional Debts

In some cases, debtors incur new debt after the confirmation of a Chapter 13 plan due to unforeseen circumstances such as emergency spending. These additional debts could potentially be integrated into the existing repayment plan; however, this requires the approval of the court and, in some instances, creditors. Adjusting the plan to include these debts can ensure that all obligations are managed in a unified and sustainable manner.

Job Loss

When stable employment is no longer a given, the terms of a Chapter 13 repayment plan may become impractical or impossible to meet. Individuals in such a situation must be proactive and file for a plan modification to address the reduced income. Through this process, payments can potentially be lowered, thereby relieving the stress of trying to meet financial obligations without a reliable paycheck.

Illness or Injury

Medical emergencies can be costly, and if a debtor or their dependent becomes ill or injured, it could result in significant medical expenses. In fact, medical debt is the main reason many people file for bankruptcy in the first place. When these types of unforeseen hardships occur, they can significantly impact one's financial stability and ability to maintain the existing Chapter 13 payment plan. Modifying the repayment plan to account for these expenses can help alleviate some of the financial burden.

How to Modify Your Chapter 13 Plan

To modify your Chapter 13 plan, the process typically involves the following steps:

Contact Your Attorney - The first step should always be to consult with your bankruptcy attorney. They will provide you with the guidance you need and help you understand the feasibility of a plan modification based on your current circumstances.
Review Your Budget - Reassess your income and expenses to determine how they have changed since you first filed. Accurate financial information is paramount in creating a modified plan that is both manageable and acceptable to the bankruptcy court.
Prepare a Revised Plan - With your attorney’s assistance, draft a revised Chapter 13 plan. The updated plan should reflect your new financial reality and show the court how you intend to manage the plan payments moving forward.
File a Motion to Modify - Once the revised plan is prepared, your attorney will file a motion to modify the plan with the bankruptcy court. Notice of this motion must be provided to all of your creditors, who will have the opportunity to object to the proposed changes.
Attend a Hearing - The court will schedule a hearing to consider the motion. You may be required to attend this hearing and be prepared to explain the reasons for the modification and how the changes will allow you to successfully complete the plan.
Creditor Objections - Creditors have the right to object to the modification. Your attorney will negotiate with objecting creditors to try to reach an agreement on the terms of the modified plan.
Court Approval - If no objections are filed, the court will normally grant the motion. The judge will make the final determination on whether the proposed plan modification is approved. Factors considered include the justification of the change in circumstances, the fairness to creditors, and your ability to complete the modified plan.

Remember, the process and requirements may vary based on local laws and the specifics of your case, so this overview should only be used as a starting point. Contacting a knowledgeable attorney who's experienced in handling Chapter 13 bankruptcy will be crucial in successfully modifying your repayment plan.

What if a Modification Doesn't Help Me?

Sometimes, even with a modified plan, financial burdens may remain too heavy to bear. When a modification isn't enough to offset the challenges you're facing, you might need to consider alternative options. These can include converting your Chapter 13 bankruptcy to a Chapter 7 bankruptcy, which can lead to a discharge of certain unsecured debts. However, this isn't a step to be taken lightly – converting to Chapter 7 may result in the liquidation of some of your assets.

Another possibility might be to seek a hardship discharge under Chapter 13. This route is only available under specific conditions, such as when circumstances beyond your control, excluding misconduct or mismanagement, prevent you from completing your plan, and when creditors have already received at least as much as they would have under a Chapter 7 liquidation.

Finally, if neither option is viable, you may find it necessary to dismiss your Chapter 13 case and deal with your debts outside of bankruptcy. This could mean negotiating directly with creditors or exploring other debt settlement options.

However, it's important to note that dismissing your case will remove the protections that bankruptcy provides, which could open you up to collections, lawsuits, or foreclosure.

In any case, your decisions and actions need to be carefully considered. That's why the counsel of a bankruptcy attorney is invaluable. They can provide tailored advice based on the specifics of your situation and help you find the best possible outcome for you.