What happens during the years of a Chapter 13 case after the judge approves your plan and you finish it?
This blog post considers what happens if during the 3 to 5 years of a Chapter 13 case your financial situation changes, particularly if your income goes down or your expenses go up so that you can no longer afford to make the monthly plan payment that you proposed and the bankruptcy court approved.
The point of this series is to help you become more comfortable with the process, whether you are considering filing a Chapter 13 case or are already in one. To feel reasonably comfortable entering into a multi-year procedure nothing seems more important than knowing how flexible that procedure is for dealing with changes outside your control that come up during that period of time.
This “Walking through a Simple Chapter 13 Case” series of blog posts follows the case of a married couple, Andrew and Amanda, who are using Chapter 13 to save their home from foreclosure and to deal with a substantial income tax debt. In the last blog post their plan was approved by the bankruptcy judge at the “Confirmation Hearing.” Besides resuming regular monthly payments on their first mortgage, the couple is paying to the combination of all of their creditors $525 per month. They are paying this amount for about four years, most of which is going to catch up on their mortgage arrears and to pay income taxes they could not have discharged (legally written off) in a straight Chapter 7 bankruptcy.
(See the five earlier blog posts in this series for more information about this couple’s circumstances, and how their Chapter 13 case has played out until this point.)
The Financial Bump in the Road
Two years and three months after filing their Chapter 13 case, Andrew finds out that three months later his employer would be closing down the branch where he’s been working for many years. He finds a new position at another division of the company to transfer to, but it means accepting a reduction in gross income of $300 per month. After income taxes that results in $250 less net income per month. But the new position means a somewhat shorter daily commute for Andrew, averaging about $40 less per month in gasoline and vehicle maintenance expenses. With the $250 reduction in net income partially offset by this $40 reduction in expenses, the couple will have $210 less each month to pay into their Chapter 13 plan. That means that as soon as Andrew starts his new job they will no longer be able to pay $525, but rather $315. ($525 minus $210 = $315.)
The “Post-Confirmation Modified Plan”
Amanda and Andrew tell their attorney about this upcoming change in their income and expenses. The attorney prepares an amended Chapter 13 plan reducing their monthly payment to the Chapter 13 trustee from $525 to $315, as well as amended income and expense schedules reflecting their changes. (Note: the terms “modified plan” and “amended plan” mean the same thing and are used interchangeably. “Post-confirmation” simply means that the plan is being amended after (instead of before) an earlier plan was approved, or “confirmed,” by a bankruptcy judge.)
Amanda and Andrew sign the new plan and schedules, their attorney sends those to the trustee for approval, and after getting that approval files the plan and schedules at the bankruptcy court. All the creditors are also sent copies, and given a certain amount of time to object.
Because this newly amended plan does not change how much the creditors are receiving, but instead merely stretches out the time for getting paid, no creditors file any objections. The new plan thus becomes effective right when Andrew starts his new job with the reduced income.
The Modified Plan Calculations
But how can a Chapter 13 plan payment simply get reduced midstream? And is there a limit how much it can be reduced?
Generally it can be reduced to match changes in debtors’ income and expenses. But there are definitely limitations in this. Without getting too complicated here, the payment cannot be reduced so much that the case will run longer than a total of 5 years, or 60 months.
In Andrew and Amanda’s case, assume that their plan as originally approved by the bankruptcy judge required them to pay 48 months of $525 payments, or a total of $25,200—in order to have enough to pay their first mortgage arrearage, income taxes, and whatever else had to be paid. At the time that their plan payments were reduced from $525 to $315 per month, they had paid $525 per month for two and a half years, or 30 months. So they had by that point paid to the Chapter 13 trustee $525 times 30, or $15,750. That left $9,450 left to pay ($25,200 minus $15,750). Now with their monthly plan payment of $315 going forward, Andrew and Amanda need another 30 months to pay that $9,450. ($9,450 divided by $315 monthly payments = 30.) Having been in their case for 30 month, the additional 30 months would make their plan a total of 60 months, or 5 years, thus meeting the 5-year limitation.
This plan amendment procedure allows Amanda and Andrew to finish their Chapter 13 case in spite of a reduction in their income. As a result they can continue to take advantage of Chapter 13’s benefits for them: saving their home from foreclosure, writing off some tax debt while paying the rest under protection from the IRS, overall reducing their debts by more than $100,000, and leaving them at the end of their case caught up on their home mortgage, and owing nothing to the IRS or to any other creditor other than their first mortgage.