How to Lower Your Chapter 13 Bankruptcy Plan Payments

If you lose income or incur unanticipated expenses during Chapter 13 and can't afford your Chapter 13 plan payments, you have a couple of options. If you can turn the situation around within a few months, you can seek a temporary break on plan payments. If the financial downturn is permanent, the bankruptcy court might be able to modify your plan to lower your monthly payment. However, it will depend on what you're paying in your current plan.

Temporarily Pausing Chapter 13 Payments

A payment moratorium gives you a break, usually for no longer than 90 days, from making monthly payments to the Chapter 13 trustee. If you miss a payment, the Chapter 13 trustee will usually allow you to make up the payment the following month.

If you need more time, the bankruptcy court might accommodate you 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.

Completing Payment Within Five Years

Before discussing informal accommodations with the Chapter 13 trustee or initiating a formal pause in payments with the bankruptcy court, it is essential to know the following: You must complete all payments under your plan within five years of the date you started making them, which is usually within 30 days of filing bankruptcy. This rule limits the type of help available.

Moratoriums Don't Change Plan Terms

A moratorium gives you a temporary break until you recover from a short-term financial problem. Once it ends, you must pick up from wherever you left off and resume making monthly plan payments.

You can often deal with a brief break informally with the Chapter 13 trustee. If you miss a Chapter 13 payment, most trustees will agree not to file a motion to dismiss your case if you quickly make up the missed payment by paying more the following month. But you must communicate with the trustee as soon as possible.

However, the trustee can't extend your plan length. If the length of your Chapter 13 plan is shorter than five years, you can ask the court to allow you to skip a few months and extend the plan period. If it's five years, this approach won't be available.

It's important to understand that if you receive a brief payment respite, you'll want to pay any late fees and costs incurred during that period for debts like mortgages, vehicle loans, and tax debts. If late fees pile up and go unpaid, the lender will continue assessing fees monthly. You could owe a significant amount when the plan concludes and face foreclosure or repossession.

Permanently Reducing Chapter 13 Plan Payments

The bankruptcy court must approve ongoing plan payment modifications, and the court won't consider lowering the amount you pay unless your income reduction was due to no cause of your own. The following examples would be regarded as compelling circumstances:

• being forced to take a lower-paying job
• suffering an injury or disability that permanently interferes with your ability to work, or
• for self-employed debtors, losing key customers, or incurring unanticipated business expenses.

Also, a plan modification must comply with the exact requirements followed when confirming a plan in the first place. For instance, your modified plan must be "feasible" or workable, meaning you must show sufficient income to pay the new, lower monthly payments through the balance of your plan term.

Limits on Chapter 13 Payment Reductions

The bankruptcy judge can't simply lower your payment to match your income. Bankruptcy law requires that all Chapter 13 plans, original or modified, pay certain debts.

A judge can only reduce the payment by the amount currently paid toward debts in the lowest "nonpriority unsecured debt" payment category, which includes obligations like credit card balances, medical bills, and personal loans. A plan modification won't be possible if the current plan doesn't pay anything toward these debts.

For a refresher, here's what your plan must pay.

Priority debts. A Chapter 13 plan must fully pay all priority claims, such as child and spousal support, fees owed to your bankruptcy lawyer and the Chapter 13 trustee, and recently incurred taxes.

Secured debts. When keeping a home, car, or other property securing a debt, the plan must pay the related mortgage, auto loan, or other finance agreement, plus arrearages. If the court reduces the plan payment by the amount paid to a secured creditor, the debtor must return the home, vehicle, or other collateral to the lender.

Unsecured "best interest of creditors" debts. All Chapter 13 plans must meet the "best interests of creditors" test. The test requires debtors to pay unsecured creditors at least as much as they would receive in Chapter 7. This amount equals the value of all property not protected by a bankruptcy exemption—the assets the trustee would have sold in Chapter 7—minus sales costs.

If your current plan pays something to unsecured creditors, subtract the "best interest of creditors" portion to determine the amount the bankruptcy court can reduce your plan. Whatever remains, if anything, is how much your plan can be reduced.

Because of the complexity of calculating Chapter 13 plan payments, it's best to consult a bankruptcy lawyer.

How to Pause or Modify Plan Payments

If you can't work out a missed payment with the trustee, you or your lawyer must file a motion with the bankruptcy court and give notice to the trustee, creditors, and other parties. The court might set a hearing immediately or wait for an objection from a creditor or the trustee. The judge will grant your motion if you prove you meet the abovementioned requirements.

Other Options

The bankruptcy judge often can't lower a Chapter 13 plan payment to meet the debtor's new income. Filers in this situation typically consider requesting a Chapter 13 hardship discharge, converting to Chapter 7, or dismissing the Chapter 13 case.

Learn your options if you can't afford to make your Chapter 13 payment.