Chapter 13 bankruptcy helps manage debt by extending your repayment duration. One requirement for filing a Chapter 13 bankruptcy case is a sufficient income to make monthly payments. Life is unpredictable, and along the way, you might lose your job, making it hard to keep up with your payments. For example, during the coronavirus pandemic, there was a significant rise in unemployment. So, what happens when you become unemployed after filing Chapter 13?
When filing for Chapter 13, you will need to come up with a new payment plan for all your debts. This plan will be based on your assets, income, obligations, and financial situation as you file for bankruptcy. You can use a free Chapter 13 calculator to estimate how much your repayment can be if you decide to file Chapter 13 bankruptcy.
The court will assign a Chapter 13 trustee who ensures you make your payments and credits these payments to your creditors. Therefore, your only role is to make the payments, and you will not be in direct communication with your creditors.
Sometimes, the court may put a wage withholding order. The order directs your employer to deduct a certain amount of money from your salary and channel it to your Chapter 13 payments. The trustee then disburses the money to your creditors following the terms and conditions of the new repayment plan.
In most cases, Chapter 13 installment extends between three and five years. However, this is a long period, and sometimes, situations like unemployment could happen, making it difficult to continue making your payment. Additionally, a reduction in income or a sudden illness can reduce the amount of money available for payment.
What happens when you become unemployed during your Chapter 13 case? First, you need to consult a bankruptcy lawyer. Usually, missing a series of payments under Chapter 13 could result in dismissal. A bankruptcy attorney can advise you accordingly on what to do to avoid your case from getting dismissed.
What Are the Consequences of Missing Chapter 13 Payments?
After coming up with a bankruptcy payment plan, the court expects you to honor the agreement. So, missing a payment could result in the dismissal of your case as the Chapter 13 bankruptcy trustee can file a motion to dismiss your case. The court will schedule a hearing on the motion, and if you fail to catch up with your payments before the hearing or attempt to settle the arrears, the court will dismiss your bankruptcy case.
When the court dismisses your case, you will still owe the debts you did before filing bankruptcy. Thus, the automatic stop on your accounts is lifted, and your creditors can resume taking action to collect outstanding debts. They can hire debt collectors, get a wage garnishment order or foreclose your home.
However, it is rare for a Chapter 13 trustee to file a motion for dismissal after one missed payment. They are likely to wait until you are two or more months behind before filing a motion to dismiss your case. However, you shouldn’t make assumptions about what your trustee will do. Instead, the purpose is to make your payment on time, and if you can’t, consult your lawyer.
How Can I Stay in Chapter 13 if I Become Unemployed?
If you unexpectedly lose your job while under Chapter 13 bankruptcy, you can remain in Chapter 13 bankruptcy if you find another job fast. Here is how you can stay in Chapter 13;
1. Petition a Moratorium of Payments
After losing your source of income, you might need a break for a month or more to get another income to resume making your Chapter 13 payments. You can file a petition to the court for a moratorium of payments to give you time to find another job to make your repayments.
The maximum duration for a Chapter 13 payment plan is 60 months. So, you cannot extend your repayment plan beyond five years. Therefore, when coming up with a repayment plan, an experienced bankruptcy attorney will calculate a workable plan within 57 months. They leave an open three months to cushion you if you ever lose your source of income and need a moratorium.
2. File a Motion to Dismiss the Chapter 13 Bankruptcy
Chapter 13 plan is voluntary to help you catch up with your payments. However, if you lose your source of income, you can choose to dismiss the Chapter 13 bankruptcy.
To manage your debt, you can choose to file Chapter 7 bankruptcy after dismissing your chapter 13 when considering Chapter 7 vs Chapter 13 bankruptcy. However, you need to be eligible for Chapter 7 bankruptcy. Determine your eligibility by taking this chapter 7 means test calculator. The results will help you understand the options available and shed light on if you are a good candidate for Chapter 7 bankruptcy.
3. Change the Terms of the Chapter 13 Bankruptcy Plan
You have the option to amend your Chapter 13 plan payment after landing a new job. If your current job pays less than the previous job, you need to adjust your monthly payments. A change in income is a justifiable reason to amend your Chapter 13 plan.
However, in some cases, the Chapter 13 trustee can object to the amended plan. For example, if you quit your job and take on a lower-paying job, the trustee might consider it a fraudulent attempt to avoid repaying debts. You might need to hire a bankruptcy lawyer to help argue that your actions are in the best interest of your creditors.
4. Consider Debt Relief Option
If you decide to move forward with a Chapter 13 dismissal, you may consider the debt relief option. For example, there’s often greater payment flexibility with debt relief, which can help if you have become unemployed.
That said, if you decide on debt settlement, you should consider CFPB’s warning about debt relief services including the high fees charged and the chance of debt collection lawsuit. You can also research how CFPB sued a debt relief company called Freedom Debt Relief for misleading consumers about debt settlement services. National Debt Relief is another large debt relief company in this space, so you may consider reading about it’s fees and reviews before signing up.
5. Convert Your Chapter 13 Bankruptcy to a Chapter 7 Bankruptcy
Have you tried searching for a job but cannot find one? You have the option to convert your Chapter 13 into a Chapter 7 bankruptcy. After taking the means test and identifying you are eligible for filing chapter 7 bankruptcy, you should also consider the filing costs.
Filing bankruptcy is not free, and the cost varies from state to state. Here is a guide on how much does it cost to file bankruptcy in Alabama and the cost to file bankruptcy in Hawaii. Before deciding to convert to Chapter 7 bankruptcy, research your state’s specific charges for filing bankruptcy for an accurate prediction.
Chapter 7 bankruptcy is advantageous since you stand a chance to get your debts forgiven at the end of the case. The court may grant you a bankruptcy discharge, an order that relieves you of the legal obligation to repay your outstanding debts. It also prohibits creditors from taking action to recover their debts.
So, by converting your bankruptcy case, there is a probability that the court can discharge your debts in less than six months. However, some unsecured debts like domestic support, specific taxes, and student loans cannot be discharged.
Consult an Experienced Chapter 13 Bankruptcy Lawyer about Your Unemployment
If you have lost your job and can hardly meet your debt obligations, including your chapter 13 payment plans, you need to consult an expert. While you can use this 11 word phrase to stop debt collectors, you should consider filing for bankruptcy. However, before you do, you need to consult a bankruptcy attorney. Since they understand bankruptcy at length, they can offer practical solutions to address the problems. Contact us today to consult a reliable bankruptcy attorney.