What Happens in Chapter 13 if I Lose My Job?
Chapter 13 bankruptcy is a plan to pay something to your creditors, depending upon your income. It is also a way to save your house from foreclosure or your car from repossession. But your payment is chapter 13 is determined mostly from your ability to pay, your income. The court has to find that you have enough income to make the proposed payments. So what happens when your income goes down? What happens when you can no longer afford to make the payments that the court has ordered?
If you can no longer afford the chapter 13 plan payments, you must do one of two things, or you will lose the protection of bankruptcy. You must either modify your plan to provide for payments that you can afford, or you must convert your case to chapter 7. The option that you choose depends upon a number of factors.
First, why were you in chapter 13? If you were in chapter 13 bankruptcy because your income was too high for chapter 7, you might now have the option of converting your case to chapter 7 and getting a quicker and easier discharge. If the means test calculation, under your new circumstances, results in no disposable income, then conversion to chapter 7 may be possible.
If you were in chapter 13 for the purpose of saving your home from foreclosure, then even if you can convert to chapter 7, you will lose your home in foreclosure. If you want to continue saving your home from foreclosure, then you must determine if you can still afford it. Of, if you were also trying to “strip” a second mortgage in your chapter 13 plan, you will want to continue in chapter 13. That second mortgage can only be eliminated if you complete your plan successfully. If your plan included a significant amount for unsecured creditors, then elimination of some monies intended for those creditors will result in lower payments. Or, if there is something else in your plan, like a car, you might be able to choose to keep the home, but surrender the car in order to lower your payment. Or, if your loss of income is only temporary, you might be able to propose a plan with lower payments until your income increases. Ultimately though, in order to stay in chapter 13, you must propose a modified plan that is feasible, a plan that you can afford to pay.
Conversion to chapter 7 will result in the discharge of the debt that was secured by your home and by your car (but, see material on reaffirmation), as well as any new debt that you have incurred after filing your bankruptcy. However, unless you are current in payments on the mortgage and the car loan, you will have to surrender those assets.
What to do if your income decreases while in chapter 13 depends on why you were in a chapter 13 plan and what you can afford to do. Were in chapter 13 because of income only? Then, conversion to chapter 7 will be attractive. Was it to save your home or car, or to strip a second mortgage? Then, modification of the plan must be explored. Is your loss of income temporary? You may be able to propose a modified plan with lower payments until income is restored. Or, were you in chapter 13 for multiple reasons? Then, the solution is more complicated. Most important; act before you get too far behind or your choices will be limited. You need to consult with an experienced chapter 13 bankruptcy attorney.
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The statements of law made here are general statements of law, effective at the time published and subject to change from time to time. These statements are not intended, nor may they be construed, to be applicable to any particular set of factual circumstances nor to any particular person. I recommend that all readers seek the assistance and advice of an experienced bankruptcy lawyer for guidance in their particular circumstances.
© Copyright 2012 David C. Hoskins, licensed Colorado lawyer