It’s good to know that your Chapter 13 payment plan can be changed during the 3 to 5 years the case lasts to address changing circumstances.
Last time we discussed making adjustments in your Chapter 13 plan during the first couple months of the case. That’s when you and your lawyer may adjust your plan to get court approval, or “confirmation.” Today we get into changes you may make to your payment plan AFTER confirmation.
Why Modify Your Plan After Confirmation?
A lot can happen during your Chapter 13 case, which will likely last 3 to 5 years.
- Financial changes: Your income could go up or down; your expenses could do the same. If the changes are modest, that may not require a change in the terms of your plan. If they are more significant you may either benefit from changing your plan or you may be required to.
- Goal changes: One or more of the goals of your case may have changed, resulting in changes to the plan. For example, you no longer want to keep your home because you got a job in a different state.
- Legal assumption changes: Your plan might possibly get approved before some legal issue is resolved. For example, you may not yet know whether you’ll be able to establish that a big student loan debt qualifies for a “hardship discharge.” Or it may yet be clear whether a particular tax qualifies as a “priority” debt. Your plan may have to be modified depending on how such issues are resolved.
- Planned-for changes: Sometimes your lawyer puts together your Chapter 13 plan with the intent of modifying it later. For example, you intend to sell your home as soon as your two young adult children finish their schooling. So a couple of years into your case you modify your case reflecting that.
How Plans Are Modified After Confirmation
Changes to the terms of your Chapter 13 plan are made as follows:
- After some change in your circumstances you and your bankruptcy lawyer discuss your options and you decide to modify your plan.
- Based on information you provide him or her, the lawyer prepares the modified plan and any accompanying documents. Those documents include amended schedules of your income and expenses showing how those have changed.
- You review and sign the modified plan and other documents; your lawyer files them at court. Copies are sent to all creditors or to all which are still legally involved. (Those are mostly the ones who’ve filed proofs of claim in your case, confirming you owe them money).
- Creditors have an opportunity to object to the proposed modified plan. If one does your lawyer either resolves the objection informally with the creditor or else there’s a court hearing. (You very seldom need to attend such a hearing, but always can if you want to.) Often no one raises objections.
- Once the deadline for objections has passed, or any objections are resolved, your new plan becomes the official plan in the case.
How Much Flexibility to Modify Your Plan
As we said a couple of blog posts ago, how much you can change your plan after it’s been court-approved is different in each case. Some plans have a huge amount of flexibility, some have very little.
Understandably a modified plan has to meet all the requirements of a Chapter 13 plan. Original plans that are on the edge of meeting the requirements tend to be harder to modify. Ones that easily meet the requirements tend to be easier.
An example of a plan that may be harder to modify is one in which a debtor fell far behind on a mortgage and is paying all they can afford in their plan to catch up. What happens if a couple years into their case their income significantly decreases or expenses increase? It may not be possible to reduce their plan payment to match what they can now afford. That’s because a plan can take no longer than 5 years. See Section 1329(c) of the Bankruptcy Code. If the original plan stretched payments out as long as possible there’s no flexibility to stretch them any further.
But there are many, many types of Chapter 13 plans with a lot of flexibility.
Take this example of a person who owes $4,000 in “priority” income taxes. This means these taxes can‘t be discharged under Chapter 7 and must be paid in full during a Chapter 13 plan. The original 3-year plan had monthly payments of $350 per month (covering all creditors). This was based on how much the person could afford. The remaining money beyond what was earmarked for the taxes went to pay the remaining creditors 30% of their debts. After a year of paying the $350 per month the person lost her job and got another one with $250 less net income. Her original plan can easily be modified to pay only $100 per month for the final two years. Why? That’s a total of $6,600 being paid into the plan. ($350 for the first 12 months and $100 for the remaining 24 = $4,200 + $2,400 = $6,600.) That’s more than enough to pay off the $4,000 in income taxes. The remaining creditors would receive much less than 30% but still receive all that the person can afford to pay. Assuming that the modified plan would meet all the other Chapter 13 requirements, it would be approved.
There are countless other kinds of successfully modifiable Chapter 13 plan. When you and your bankruptcy lawyer set up your original plan ask how modifiable it would likely be. You should not enter into a plan without discussing the scenarios in which it might need to be modified, and how successfully that could be done.