Key takeaways
- The court could dismiss your case or change it to Chapter 7 if you’re late on your Chapter 13 payment.
- You can request a payment reduction or amendment if you’ve faced an unexpected financial hardship.
- If you miss a payment or think you could be late in the future, reach out to your bankruptcy trustee or your attorney immediately and let them know.
Chapter 13 bankruptcy, also known as reorganization bankruptcy, allows certain debts to be discharged without giving up important assets. However, one of the major caveats of this legal process is that you must also have regular income and commit to a structured repayment plan that typically lasts between 36 and 60 months.
So what happens if you miss one of these payments or experience an unplanned financial hardship like a job loss or medical emergency? Here’s what you’ll need to know.
Consequences of missing a Chapter 13 payment
A payment that is late by a few days may not result in a negative consequence. For one-time delays, you might be able to explain your situation to the trustee and reach an agreement to get up to date on your payments so you can avoid adverse actions against your case. However, it’s best not to risk it.
Thirty days after your Chapter 13 filing date, you are required to begin making plan payments to the bankruptcy trustee for your case. This is required even if the court hasn’t fully approved your plan yet.
If you have secured debt, like for a home or vehicle, you’ll still have to make payments directly to those lenders. However, the amount you pay them directly during this time can be deducted from the payment sent to the trustee.
Technically, missing even just one Chapter 13 payment puts you in breach of your arrangement with the court. From there, two potential consequences could occur: a case dismissal or conversion to Chapter 7 bankruptcy.
Case dismissal
After one or more missed Chapter 13 payments, the trustee may file a “motion to dismiss for material default.” This is another way of saying that they can’t pay your creditors since you haven’t paid the trustee.
If the court grants the order, your Chapter 13 case would be dismissed, and you’d no longer qualify to have your unsecured debt discharged.
Conversion to Chapter 7
In addition to the court dismissing your case, another possible outcome is that your case may be converted to a Chapter 7 bankruptcy. The main difference between Chapter 7 and Chapter 13 is that in a Chapter 7 process, the court can liquidate your nonexempt assets to pay your outstanding debts. This means selling your home, vehicle or other property to produce the funds necessary to settle with your creditors.
A Chapter 7 filing lasts up to 10 years on your credit, while a Chapter 13 only lasts up to 7 years. This will not only be damaging to your credit score, but creditors likely will be wary of lending to someone who has a history of nonpayment. That could mean difficulty securing the financing needed for a mortgage, auto loan or any other line of credit in the future. However, bankruptcy can be better for you long term that struggling with debt if you’re continuing to miss or make late payments.
What to do if you expect to miss a payment
Even relatively financially stable people sometimes forget to make a payment or fall victim to hardship. When this happens, it’s not the end of the world. However, it is important to handle the situation.
Notify the trustee
If you’re experiencing financial distress or believe you will miss a payment, your court-appointed trustee is the first person to contact. Because they are your point of contact between you, your creditors and the court, they must be aware of your intentions.
Communication will go a long way to demonstrate your commitment to your Chapter 13 bankruptcy process. You don’t want the trustee to assume you’ve abandoned the repayment plan and make a motion to dismiss your case. Instead, this will help show you’re being responsible and taking your obligations seriously.
Communicate with your lawyer
Though it’s not required, some people work with a bankruptcy attorney to help guide them through the Chapter 13 process. If you have one, let them know about any lapses in payments. Because your lawyer advocates for you, they need to have the facts at all times to provide you with proper options and guidance.
Steps to take if you miss a payment
When you’re late on making payments or experiencing financial hardship, it’s important to consider your choices and decide what to do next. Here are a few options to consider.
Make a catch-up payment
Assuming the trustee has granted you a few extra days, use this time to produce the funds needed to get caught up. This could mean temporarily cutting back on other expenses or working a few additional hours to cover the difference.
However you decide to proceed, make sure it won’t add financial strain to an already burdened situation.
Work out a repayment plan with the trustee
If the missed payment is too large to cover all at once or you missed multiple payments, you may need to break the full balance into smaller amounts. For example, you might add $100 to each payment over six months.
Work with the trustee to lay out a repayment plan that is practical and realistic.
Ask to put your payments on hold
If you’re struggling financially, the best course of action may be to request an “abatement” from the court. This simply means pausing your payments for a few months. Doing so might give you adequate time to overcome your hardship by finding a new job or paying off an unplanned expense, enabling you to begin making regular payments again.
Amend the repayment plan
If the missed Chapter 13 payment occurs before the court has confirmed your plan, you may be able to file for an amended payment plan.
Under this amendment, you explain how your financial circumstances have changed and provide additional documents proving your situation. Your bankruptcy trustee and creditors will review your proposed changes, and if all parties are in agreement, the court will use the amended plan during your confirmation hearing.
Even if the plan has been confirmed, your lawyer may be able to help you file a motion to reduce your monthly payment amounts. Again, you must justify your reason and have documented evidence to support this claim. If the court agrees, it will change your payment for the remainder of your plan.
Let the court dismiss the case
If you’re unsuccessful at getting an amendment, then letting the bankruptcy court dismiss the case could be a strategic move. A dismissal opens the door to possibly re-filing for Chapter 13 bankruptcy.
While that would mean restarting the process and locking into another three to five years of payments, the benefit is that your current financial situation would be reassessed. In the case of financial hardship, this could result in a lower payment than you were previously making.
Convert to Chapter 7
Though Chapter 7 may result in losing property, it could be the better long-term option. The path to discharge is only four to six months rather than three to five years in Chapter 13. That would mean an expedited fresh start and putting your debt behind you.
The bottom line
Missing a Chapter 13 bankruptcy payment can jeopardize the process. However, many trustees understand that financial difficulties can get in the way and are willing to work out an arrangement to get you back on track. The best thing you can do is to be proactive, communicate with your trustee and lawyer and determine the best next step.
Frequently asked questions
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