How to Lower Your Chapter 13 Bankruptcy Plan Payments

If your financial circumstances change after your Chapter 13 plan has been confirmed, may be able to get a temporary break from making plan payments or a long-term reduction in plan payment amounts. This might be key to finishing the bankruptcy if, for example, you lose your job, are forced into a lower-paying or part-time position, or incur major, unanticipated expenses, like medical bills and moving costs.

Your options in bankruptcy court depend upon the circumstances. If you can turn the situation around within a few months, you can seek a temporary moratorium on plan payments.

If you are dealing with a long-term change but still have"disposable income," you can ask the bankruptcy court to allow you to modify your plan and lower your monthly payments on a permanent basis.

(To learn more about the Chapter 13 plan, see the articles in The Chapter 13 Repayment Plan.)

A Plan Moratorium: Temporary Relief From Having to Make Plan Payments

A plan moratorium gives you a break, usually for no longer than 90 days, from having to make monthly payments to the Chapter 13 trustee. The bankruptcy court may allow a plan moratorium, for example, if you face:

• a short-term gap in employment
• a temporary injury or disability, or
• significant, unanticipated expenses that keep you from being able to make one or more plan payments.

Moratoriums Don't Change Plan Terms

A moratorium does not change the terms of your plan. A plan moratorium just gives you a temporary break until you can bounce back from a short-term financial problem. Once the moratorium ends, you have to pick up from wherever you left off and resume making plan payments on a monthly basis. If you had 24 payments due under your plan when your moratorium began, for example, you still have 24 payments to make until your moratorium ends.

You Must Complete Payment Within Five Years

Regardless of the length of the moratorium, you must complete all payments under your plan within five years of the date that you started making them. Generally, you have to start making plan payments within 30 days of filing bankruptcy. This means that in most cases, you have about 61 months from the date that you filed bankruptcy to make up any plan payments deferred during a moratorium. If you can't make up your missed installments within the five-year period, you must obtain court approval for other relief, such as modifying your plan to lower your required payments.

Modifying Your Plan to Lower Required Payments: Permanent Changes

To lower monthly payments over the long term, you have to ask the bankruptcy court to modify your plan. Cause for modifying your plan to lower your monthly payments includes:

• having to take a lower-paying job
• for self-employed debtors, losing key customers or incurring unanticipated business expenses
• suffering a serious injury or disability that permanently interferes with your ability to work, and
• having to pay health insurance premiums for yourself or your dependents that were previously covered by your employer.

Seeking to lower your plan payments makes sense when your financial situation has changed but you still have "disposable income" – in other words, money left over after you deduct your reasonable, necessary expenses from whatever you earn. Lowering your plan payments requires you to modify your Chapter 13 plan, because you are changing one of its key terms.

Bankruptcy law imposes essentially the same requirements to modify a Chapter 13 plan as it does to confirm a plan in the first place. Among other things, the modification must conform with the following:

Priority Debts

To be confirmed, a Chapter 13 plan must provide for full payment of all priority claims (unless their holders agree to take less). A modified plan likewise must cover all priority claims, including child and spousal support, fees owed to your counsel and the Chapter 13 trustee, and subject to specified time limits, back taxes.

Secured Debts

In most Chapter 13 cases, the primary secured claims are home mortgages and automobile loans. A plan modification generally does not excuse you from making monthly payments on home and auto loans. You also must continue to pay arrearages and other defaults that you promised to cure under your original plan so you could keep your home or car.

Unsecured Debts

The bankruptcy court will not confirm a Chapter 13 plan – or let you modify it – unless you meet the "best interests of creditors" test. The "best interests of creditors" test requires debtors to pay holders of general unsecured claims at least as much as they would receive in a Chapter 7 liquidation. In most liquidations, unsecured creditors receive little or nothing, so you can usually reduce your plan payments without violating the "best interests" test.

Feasibility

Your plan, as modified, must be feasible – or in other words, workable. You must show that you have dealt with your financial problems and can make the new, lower monthly payments through the balance of your plan term.

How to Ask for a Moratorium or Modification

To obtain a plan moratorium or modification, you must file a motion, either on your own or through counsel, with the bankruptcy court. You also must give notice of the motion to the Chapter 13 trustee, creditors, and other parties in interest in accordance with the local rules for the district where you live. Depending on the local rules and practice in your district, the court may set a hearing when you file the motion, or only if a creditor or the trustee objects to it.

As the moving party, you have the burden of proof and must demonstrate to the bankruptcy court why your motion should be granted. If the court agrees, it will grant your motion in an order approving your requested plan moratorium or modification.

You Can Also Convert to Chapter 7

In some cases, it may be best to convert your bankruptcy to a Chapter 7 and eliminate the monthly payments altogether. For more on this option, see Converting a Chapter 13 Bankruptcy to Chapter 7.