Chapter 13 bankruptcy, which is also known as a wage earner bankruptcy plan, allows individuals with a steady income to pay back a part of their debt. The amount the debtor pays back is based upon their income, monthly bills, and other factors. Whatever is left over is considered disposable income, which the debtor can keep.
Unfortunately, circumstances change, and if a wage earner loses their job or if their income decreases dramatically during Chapter 13 bankruptcy, they might not understand what to do next. Here is valuable information for anyone going through Chapter 13 reorganization who loses their job or cannot continue to maintain their payments.
Contact Your Attorney Immediately
The first step is to call your bankruptcy attorney as soon as possible after the drop in your income occurs. Tell your attorney the specifics of your income change, how long it is expected to last, and the estimated household income for the future. Your attorney can help discuss your options, determine the best course of action, and help contact your bankruptcy trustee.
In most cases, you will have one of three options: a reduction in your weekly, monthly, or annual payment; a conversion to a Chapter 7 bankruptcy relief; or a hardship discharge. The type of relief you receive from the trustee and the court will be dependent on several factors, including how drastically your income dropped, your earning potential in the future, and the amount of time you will be unemployed.
Ask for a Payment Reduction
If your income reduction is temporary, your attorney may recommend you temporarily alter your payment plan. This will allow you to continue with your Chapter 13 bankruptcy and all the protections it provides. For example, if you are facing foreclosure, a temporary change in your bankruptcy payment plans will allow you to remain in your home. But if you cannot afford your payments and simply stop paying the trustee, your bankruptcy will be discharged, and your bank will begin the foreclosure process.
Once you are gainfully employed or your financial circumstances become better, you can begin making the payments agreed upon in the original bankruptcy agreement.
Switch to Chapter 7 Bankruptcy Plan
Debtors whose disposable income was high enough to pay back their debts can seek relief through Chapter 13 bankruptcy. However, if your income has suddenly dropped and you have significant debt to pay off, your attorney may recommend having your Chapter 13 bankruptcy converted to a Chapter 7 bankruptcy.
Otherwise known as a liquidation bankruptcy, Chapter 7 bankruptcy allows debtors to discharge a large portion of their debt. An individual must take a means test to determine if their income is low enough and their debt is significant enough to qualify for Chapter 7. According to Nolo, the first step is determining whether the debtor's income is below or above the state's average.
If your income drop is significant enough, you may qualify for Chapter 7 bankruptcy relief.
Inquire About a Hardship Discharge
Finally, if there is a significant reduction in a debtor's income and their financial situation will not change in the immediate or long-term future, the judge may grant a hardship discharge. This discharge is only granted if the debtor cannot afford a restructured payment plan. The debtor must prove that they cannot find gainful employment or pay off their debt.
For example, if the individual became severely injured or disabled and cannot work, the judge may grant the hardship discharge.
If your income drops significantly or you lose your job while going through Chapter 13 bankruptcy, there are several options available. Contact your bankruptcy attorney with any additional questions.