Late on Chapter 13 bankruptcy payment. What now?

Chapter 13 bankruptcy, also known as reorganization bankruptcy, is a legal process that allows you to restructure debt to be more manageable. As part of the process, you will be required to pay creditors a portion of the outstanding debt over three to five years during what’s known as the repayment period.

At the end of the repayment plan, any remaining debt you have left will be “discharged” — meaning you are no longer responsible for paying it. In most cases, being a few weeks late on your Chapter 13 payments isn’t a problem, but delays of longer than a month can impact your chances of a successful discharge.

What happens if you miss a Chapter 13 plan payment?

Skipping a Chapter 13 plan payment can negatively impact your Chapter 13 case. If you miss a payment under the plan, the court can decide to dismiss your case or change your bankruptcy case to Chapter 7. Under a Chapter 7 bankruptcy, the court can liquidate your nonexempt assets to pay your outstanding debts.

However, making a payment that’s late by a few days due to an unexpected financial emergency might not result in a case dismissal or bankruptcy conversion — though it’s best not to risk it. For one-time delays, you might be able to explain your situation to the trustee and reach an agreement to get up to date on your payments to avoid adverse actions against your case.

When you make your monthly plan payment, the trustee redistributes the payments across your creditors. When your payment is late or missing, the trustee doesn’t have funds to administer to your creditors. The trustee will not contact the lender to say that the payment is coming soon.

Case dismissal

If you fall more than one month behind on your Chapter 13 payments, the trustee may file a “Motion to Dismiss for Material Default.” If the court grants the order, your Chapter 13 case would be dismissed. If this were to occur, you would no longer be eligible to get your remaining debts discharged.

If your case is dismissed this way, it may be possible to file for another Chapter 13 bankruptcy. Before doing so, make sure your finances have improved enough that you will be able to keep up with the repayment plan.

Convert to Chapter 7

The court may also choose to convert your Chapter 13 to a Chapter 7 bankruptcy. This is different than discharging your case altogether. When your case is converted to Chapter 7, the trustee can opt to sell some of your property that is not protected to pay creditors. The proceeds will be used to eliminate your outstanding debt.

Is there a grace period for Chapter 13 payments?

A Chapter 13 payment plan doesn’t have a grace period. Thirty days after your Chapter 13 filing date, you are required to begin making plan payments to the bankruptcy trustee for your case. This is required even if the court hasn’t approved your plan yet.

If you have secured debt, like for a home or car, you’ll have to make adequate payments directly to your lender. The amount you pay directly to your secured lenders during this time can be deducted from the payment sent to the trustee.

What should you do if you anticipate missing a Chapter 13 payment?

Although you committed to fulfilling your payment plan when filing for Chapter 13 bankruptcy, you might encounter financial emergencies beyond your control. If you anticipate being late or skipping a payment, reach out to your bankruptcy trustee immediately. They might offer you more time to catch up on your payments.

If an attorney represents you, consider updating them about your current financial status and how it will affect your ability to make on-time payments. Being candid about your financial situation can help you find a solution to getting on track with your Chapter 13 bankruptcy plan.

Here are some of the actions to take if you think you may be late or unable to make payments:

• Reach out to your bankruptcy trustee and request more time to catch up
• Notify your attorney if you have one
• Petition the court for a payment plan modification to reduce payments
• Ask the court to extend your repayment timeline
• Request a hardship discharge from the court

Can you get your Chapter 13 payment reduced?

Changes in your finances, whether from a lost job or unexpected hospitalization, might make ongoing monthly plan payments difficult for the foreseeable future. Depending on the status of your payment plan, you have a few options to request a payment reduction.

With confirmed Chapter 13 plans, you can ask the court to reduce your monthly payment amounts by filing a motion. You will need to explain your reason for wanting to modify your plan and provide the court with documented proof supporting your claim. If the court agrees, it will formally adjust your payment amount for the remainder of your plan.

If you’re making Chapter 13 payments, but the court hasn’t confirmed your plan, you can file an amended plan. In this amendment, you’ll need to explain how your financial circumstances have changed and provide additional documents proving your situation. Your bankruptcy trustee and your creditors will review your proposed changes, and if all parties are in agreement, the court will use the amended plan during your confirmation hearing.

The bottom line

Communicate immediately and openly with your bankruptcy trustee about financial difficulties getting in the way of your payments. If you’ve proactively reached out to the trustee about an anticipated late or missed payment — and have agreed on how you’ll catch up — a single incident is unlikely to automatically dismiss your Chapter 13 case.