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When Your Chapter 13 Bankruptcy Isn’t Working For You Anymore …

Chapter 13 Bankruptcy: Not A Cage From Which There Is No Escape

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Chapter 13 Bankruptcy: A Flexible System That Can Change With Your Needs

The idea of a 3-5-year payment plan is intimidating to many prospective Chapter 13 bankruptcy filers. Never mind that many people willingly take on 6 or even 7-year auto loan payments these days; the idea of being obligated to repay something, even if only what you can afford to pay, to your creditors in a Chapter 13 is an initial turn-off to many who would benefit from the process.

Chapter 13 suffers by comparison to Chapter 7 bankruptcy, which does not require that you repay anything to creditors at all (although some debts, such as child support, may not be dischargeable). Chapter 7 has its own perils, however: a requirement that your household earn less than your state’s median income average to be eligible, the possibility that you will have personal assets seized and liquidated for the benefit of your creditors, and the possibility that relatives to whom you have repaid debts will be sued for recovery of the monies you’ve paid to them, to name a few.

Why does Chapter 13 bankruptcy sound like a raw deal in comparison to that?

It’s psychological. A fear of commitment. A fear of obligation. A fear that paying something must be a worse deal than paying nothing, even if paying nothing in a Chapter 7 is not an option for you, even if paying your debts off inside the Federal court-enforced Chapter 13 payment plan is a far better deal than you’d ever get trying to negotiate with your creditors unilaterally, on their terms.

Fear is natural, but it is, as Paul Atreides in Frank Herbert’s classic science fiction novel Dune says, also “a mind-killer.” In other words, fear can be paralyzing.

A commitment to a Chapter 13 payment should not be scary or paralyzing. Here’s why.

Chapter 13 Bankruptcy: The Absolute Right to Dismiss the Case

The first reason why you shouldn’t fear the Chapter 13 commitment is that you have virtually an absolute right to just dismiss the case anytime you find that it isn’t working for you, or if you stumble across a better financial response to your debt issues within the life of the Chapter 13 payment plan (e.g., inheritance, etc.).

In a Chapter 7 bankruptcy, there is no absolute right to dismiss the bankruptcy case. If you file the bankruptcy and find that you don’t appreciate the Chapter 7 Trustee suing your Aunt Sally for turnover of the $2,000 you repaid her for that loan 8 months before you filed, you are generally stuck (or, really, Aunt Sally is).

In a Chapter 13 bankruptcy, if your circumstances change to the point that you just don’t need the Chapter 13 to assist you any longer, for whatever reason, your bankruptcy attorney need only file a 1-page Notice of Dismissal (practice may vary from jurisdiction to jurisdiction) to get you out of it.

Chapter 13 Bankruptcy Payment Plan: Modifiable if You Undergo a Permanent Change of Circumstances

If your income decreases or your expenses increase permanently (one-time issues such as a roof repair or other emergency financial need are dealt with differently), you can also move to modify your Chapter 13 plan to decrease your monthly payment so that it remains affordable for you.

The exact procedure for modifying a Chapter 13 payment will also vary greatly from jurisdiction to jurisdiction. In the Eastern District of Michigan, for example, a proposed modification is filed with the court, noticed to all of your creditors, and your creditors and (usually primarily, in Detroit) the Chapter 13 Trustee will have an opportunity to respond and object if they believe the modification to be inappropriate. Always, documentation proving the change in circumstances will need to be provided to the Trustee or attached in exhibit to the proposed modification.

If no party objects (or if they do and you manage to work out the differences or prevail in litigation against the objecting party—for which an experienced bankruptcy attorney is always required!) and the modification is granted, the Chapter 13 plan is ordered modified for the remainder of its duration—unless your circumstances change again.

Chapter 13 Bankruptcy: The Absolute Right to Convert to Chapter 7 Bankruptcy

You also have a near-absolute right to convert your case to Chapter 7 bankruptcy at any time should you suffer a “catastrophic” change in circumstances, such as job-loss or divorce or extreme increase in monthly expenses.

Again, local practice will vary, but, in the Eastern District of Michigan, to accomplish this, a simple Notice of Conversion is filed with the court by your bankruptcy lawyer, and a volley of amended/supplemental revisions of your petition schedules and documents such as the Chapter 7 Means Test and something called a Statement of Intent which are only filed in Chapter 7s (and which would not have been filed in your original Chapter 13) are then filed with the court.

Upon conversion, you will be assigned a Chapter 7 Trustee, who will conduct a further Chapter 7 341 Meeting of Creditors hearing (s0mething you probably already did with the Chapter 13 Trustee in the Chapter 13 end of the case), while the Chapter 13 Trustee stops your wage order or ACH bank account deduction of your plan payment and wraps up the accounting of your Chapter 13 case.

With conversions to Chapter 7, you will always want to be wary of asset-liquidation issues that you didn’t have to deal with before (because assets are not liquidated in Chapter 13 bankruptcies) popping back up. The assets you own and the value of those assets is (at least initially) calculated as of the date of the filing of the case—the original filing of the case, as a Chapter 13.

So, if you had that problem with the loan repayment to Aunt Sally when you filed the Chapter 13, you will have it again, potentially (depending on Aunt Sally’s collectability at this point), upon conversion to Chapter 7, even years after the initial filing.

Chapter 13 Bankruptcy: The Bottom Line

The bottom line with Chapter 13 bankruptcy is that it is not a hole you will never be able to climb out of, or a payment you will be obliged to make come hell or high water no matter what happens in the rest of your life. Although Chapter 13 Trustees can be recalcitrant and a little too ready to object to modifications proposed and other steps you may take to remedy a change of circumstances, the Chapter 13 is a flexible system for circumstances that can’t help but flex a little over 3-5 years.

Whatever does happen in your Chapter 13, however, you will need an experienced bankruptcy attorney to help you to deal with it. Filing a Chapter 7 without a lawyer is inadvisable; filing a Chapter 13 without one is doomed to fail.  

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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