Chapter 13 bankruptcy is accessible to far more people than Chapter 7 proceedings. There is no means test to pass, and filers can potentially preserve all of their property without risking liquidation of any of their assets.
To successfully complete a Chapter 13 bankruptcy, the filer must fulfill a repayment plan that lasts from three to five years. They first negotiate the plan with a court-appointed bankruptcy trustee and representatives from their creditors. They then make a single monthly payment to the courts that the trustee distributes to the creditors.
Usually, the repayment plan requires the use of almost all of the filer’s disposable income each month. If they lose their job before completing the repayment plan, continuing the payments as scheduled could be impossible. What options does a filer have when they lose their income during a Chapter 13 bankruptcy?
Converting the bankruptcy case
If the filer goes several months without finding new employment, they may theoretically be able to pass the means test at that point. The reduction of their income could make them eligible for a Chapter 7 bankruptcy.
They may be able to file a petition with the courts to convert their Chapter 13 bankruptcy to a Chapter 7 case. They could then potentially be eligible for a discharge even though they were unable to complete the entire repayment plan as negotiated.
Modifying the plan
Perhaps the filer has found a job, but it pays less than their previous position. Maybe they have enough in cash reserves to make payments until they find new employment, but the current amount due each month puts too much pressure on their savings.
It may be possible for filers to petition the courts to modify the repayment plan based on their current resources and income. Doing so may allow them to continue making payments on time until they improve their financial circumstances.
Simply failing to make payments could result in the courts dismissing a case. Those pursuing Chapter 13 bankruptcy need to act promptly when their financial circumstances change. Asking the courts for support by changing the form of bankruptcy or altering the repayment plan could make all the difference for those who lose their jobs in the middle of a Chapter 13 bankruptcy.
