A Chapter 13 bankruptcy is a “repayment” bankruptcy, with the goal of repaying a portion of an individual’s debts over a three to five year period. The theory behind Chapter 13 is that a debtor should pay all they can afford over the life of the plan and any remaining unsecured debt at the end when the plan is discharged. As a result, Chapter 13 debtors should not have extra money left over each month to save for an emergency.
Over the three to five year life of a Chapter 13 plan unexpected things happen which can cause financial difficulty. If a financial emergency occurs during your Chapter 13, you do have options. If the emergency is temporary, you can ask the bankruptcy court to suspend your plan payments for a couple of months and consider extending the plan length to make up the missed payments. If the emergency is long-term, you can ask to modify your 13 plan to allow for more manageable payment terms. This is typically allowed as long as the reduced payments still pay a certain percentage of unsecured claims. If the financial emergency is very serious and not likely to be rectified in the near future, you may qualify for a “hardship discharge,” which means you receive a discharge without completing all the plan payments. However, a hardship discharge is reserved for those in dire straits and comes with conditions, so discuss your situation with trained bankruptcy counsel.
Conversion to Chapter 7 bankruptcy might be an option if you can no longer make plan payments but don’t meet the standards for a hardship discharge. If you decide to convert to Chapter 7, you will have to file updated bankruptcy schedules and attend another “first meeting of creditors.” Any new debts incurred since filing a Chapter 13 case can be included in the Chapter 7 bankruptcy and will normally be discharged at the conclusion of the Chapter 7 case. However, not all debtors qualify for Chapter 7, so talk with your bankruptcy counsel to make sure this option is right for you.
Financial circumstances change during a Chapter 13 case and the bankruptcy code is designed to give the flexibility needed to allow you to manage the ups and downs during the three to five years a plan exists. The most important thing is to maintain communication with your bankruptcy counsel and address problems before they get out of hand.