What Will Happen if I Lose My Job in Chapter 13?
In Chapter 13, you will be making monthly payments to your trustee to repay your debt. The amount you pay each month will depend on your income, assets, financial situation, and obligations when filing. So, when you lose your job, your income will decrease, which means your payment plan will be affected. Here are the effects of losing your job before and during your Chapter 13 plan.
Before Filing
Before filing for Chapter 13 bankruptcy, you should compare how much you would be paying in a Chapter 13 plan to other debt-relief options such as debt settlement or debt management.
Usually, debt negotiation is a better option if you have lost your job and want to get rid of debt, while Chapter 13 is better if you have some income. However, it just depends on what your income is because in Chapter 13, you may pay back none, some, or all of the unsecured debt based on your non-exempt equity and disposable income. Use our free Chapter 13 calculator in the research phase to understand your options, estimate the costs, and choose the best debt relief option.
During Chapter 13
If you had successfully filed for a Chapter 13 case, then you would have followed a payment plan and made monthly payments to the trustee. Sometimes, the court orders your employer to withhold a percentage of your wages and direct it to your Chapter 13 plan payment. The money is sent to the trustee, who uses it to pay your creditors.
Since Chapter 13 bankruptcy takes three to five years, you might lose your income or ability to work along the way. In this case, making your monthly payments as you would before becomes challenging. If you were already enrolled in a Chapter 13 bankruptcy plan, failing to make your payments due to unemployment, or due to a reduction in income that makes the payment too high, you risk getting your case dismissed.
You should notify your bankruptcy attorney immediately if you lose your job in Chapter 13. Your lawyer will advise you accordingly and recommend informing the trustee. They might also suggest measures to avoid the court dismissing your case.
Other Ways to Decrease Chapter 13 Monthly Payment
Here are some other ways to decrease the monthly payment plan without getting a dismissal.
If your income decreases, you could ask the court to lower your monthly payment plan, but you would have to get the court’s approval. In the hearing, both the trustee and creditors can object to a new payment plan and will voice their opinion. You, the debtor, will have to prove why the motion should be granted. This can be difficult to do because they may opt for a dismissal instead.
Selling off collateral, such as a house or a vehicle, can help pay off the plan.
Another option is extending the plan to 5 years, if possible. Chapter 13 can either be 3 or 5 years, so if the debtor is paying into 3 years, they can try to extYeah end it to 5 years.
Converting to a Chapter 7 may be an option as well. You would have to qualify and ensure that your assets are protected, but this option would discharge the debt and take about 4 months in total.
Lastly, the debtor could potentially request a hardship discharge, but this is rare. This would discharge non-priority debts.
What If I Stop Making Payments?
Any challenge you face that could affect your ability to make your monthly payments, like unemployment or reduction in income, should be discussed with your trustee. When you stop making your payments, the Chapter 13 trustee assigned to your case will lie in a motion asking the court to dismiss your case.
Based on this motion, the court will schedule a hearing. You have the chance to make good on the payments before the date of the scheduled hearing or work out an alternative to settle the payment before the court grants the dismissal of your case.
If the court dismisses your case, you will continue to owe your debts, and your creditors might take action to push you to pay the debt, e.g., filing lawsuits against you or recovering the debt through repossessions, foreclosures, etc.
Most trustees will, however, not file a motion to dismiss immediately if you miss your payment. They might wait until you don't make your payment for two or three months before filing the motion. Since you cannot anticipate what your trustee might do, it is best to notify them of your inability to pay with a valid reason to avoid a Chapter 13 dismissal.
Can I Continue with Chapter 13 After I Become Unemployed?
Since Chapter 13 bankruptcy gets rid of debt through a repayment plan, you need to have the income to make your payments. So, what happens after you lose your source of income? Can you continue with the plan? Yes. If you are confident you can find another job fast, you can.
1. Apply for a Moratorium on Payments
Since Chapter 13 plan payment takes a long time, the court acknowledges that some challenges might come up during the plan. You can apply for a moratorium of payment, asking the court to allow you to take a short break, usually two to three months, during which you don't make payments. This break should be used to find another job or an alternative source of income to enable you to continue with your payments.
You should, however, have a flexible Chapter 13 repayment plan for the court to grant your request. A Chapter 13 plan cannot exceed five years or 60 months. So, most bankruptcy attorneys calculate and distribute their clients' payments over 57 months. The three months left out act as a cushion should their client need a moratorium during the case. So, if you are yet to file, it is important to work with a bankruptcy attorney. If you have already filed, consult a bankruptcy lawyer to see if requesting a moratorium is possible.
2. File a Motion to Dismiss
Most trustees are open to finding a way to allow the debtor to catch up with their payments. Some may allow the debtor to pay what they can for a while and later catch up, while others may set a deadline for when you should make the payments. However, sometimes, filing a motion to dismiss your case may be the best alternative. Consult a bankruptcy attorney, and discuss the best option depending on your financial situation.
3. Amend Your Payment Plan
If you have lost your job and are willing to remain in Chapter 13 bankruptcy, you can discuss with your attorney and trustee how to lower your payment after securing a new job. For example, if you lost your job and recently got a new one paying less, you may qualify to amend your plan and lower your payment.
Note that your trustee does not have to agree with your new plan. They may object to the new plan if they deem it fit. For example, if you intentionally get yourself fired, quit your job, or switch to a lower-paying job to reduce your payments, it is considered fraudulent, and the trustee may object to the amended plan. We always recommend working with a bankruptcy attorney since they can argue and explain why an amended plan is in your best interest.
4. Converting to Chapter 7, Bankruptcy
If you cannot find a job despite your best efforts, you can consider converting from Chapter 13 to Chapter 7 bankruptcy. Due to a significant reduction in income, you are more likely to pass the Chapter 7 Means Test, which determines if you qualify for a bankruptcy discharge.
A bankruptcy discharge is debt forgiveness, where the court orders you free of the obligation to repay the discharged debt. On receiving a bankruptcy discharge, your creditors can no longer take action to recover the discharged debt. Chapter 7 takes a shorter time, and your debt might be forgiven in four to six months.
However, not all unsecured debts will be discharged. Some debts like income tax are considered not dischargeable. Also, secured debts are not dischargeable, and you will need to catch up to avoid repossession and foreclosure.
Do You Have a Chapter 13 Bankruptcy Lawyer You Can Consult About Your Unemployment?
The above options can be confusing if you just lost your job while in Chapter 13. It is best to consult your bankruptcy attorney as soon as your employment is terminated to avoid a Chapter 13 case dismissal. We can help you find one near you if you don't have an attorney.
