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You filed for bankruptcy and had a solid income which you would use to make your monthly payments under Chapter 13 bankruptcy. But over the months or years, you have become unemployed. What next? Do you discontinue the plan?
The economy has been going downhill after the coronavirus pandemic, with an increased number of layoffs and high rates of unemployment. If you lost your job while in Chapter 13 bankruptcy, here is everything you should know.
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
If you are considering filing for Chapter 13 bankruptcy, and have lost your job, then there is a lot you should know. First, you should compare how much you would be paying in a Chapter 13 plan to other debt-relief options like debt negotiation or settlement.
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. 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, you 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, depending on your repayment plan.
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.
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 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 attenuate 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 okay what they can for a while and later catch up, while others may set a decline within which 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 can 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 soonest 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.
We can also help you explore additional debt relief options through this Savvy Debt Payment Planner. Why deal with the stress of bankruptcy and unemployment yourself when we can help? Contact us today to help you achieve that bright financial future you are dreaming of.
