In my last two blogs I’ve written about a common problem with chapter 13: a client’s financial situation has changed during the time the chapter 13 case is pending, and making a monthly chapter 13 payment to the trustee, which once was affordable, is no longer affordable.
In this blog, I’ll write about the options that chapter 13 debtors have when a chapter 13 case no longer “works.” I’ll write about short-term solutions first.
A cure order can be an affordable way to solve a short-term chapter 13 problem
Chapter 13 plans require that debtors make monthly payments to a chapter 13 trustee in an amount consistent with the provisions of the debtor’s confirmed chapter 13 plan. If debtors fail to make payments on time, or if debtors fail to pay the confirmed amount, the chapter 13 trustee will, at some point, bring a motion in bankruptcy court to dismiss the chapter 13 case.
There are many reasons why a chapter 13 debtor misses a payment or payments. Some of the reasons might be short-term: an unanticipated vehicle repair or medical bill from a trip to the emergency room can create an expense that makes the chapter 13 payment unaffordable; a temporary reduction in work hours or a short-term, temporary layoff can lead to a significant, although temporary reduction in income that makes the chapter 13 payment difficult to handle.
If the chapter 13 trustee has made the motion to dismiss, the person with a temporary issue might be well served by entering into a cure order with the chapter 13 office. A cure order is a structured repayment program, in which the overdue amount of chapter 13 payments is repaid by the debtor over a period of time, which is typically up to 12 months. At Kain & Scott, we handle the negotiations with the chapter 13 offices to set up an affordable cure order payment for our clients. Cure orders are only entered into following the motion to dismiss. The bankruptcy judge’s order denies the trustee’s motion for dismissal and sets out the terms of the monthly cure payment.
Debtors and Chapter 13
During the time the debtor is in the cure order, the debtor continues to make her ongoing monthly chapter 13 payment, while making an additional payment to make up the past-due amounts. Cure orders can be very effective - a cure order is quick and it keeps a client in a chapter 13 case once the temporary financial issue has passed. But cure orders should not be entered into without some thought and planning from the debtor, since if a debtor defaults on the cure order, the debtor’s case is dismissed without another motion to dismiss or a hearing - so it is absolutely critical for a debtor in a cure order to make the agreed-upon payments on time.
While the cure order is the most common approach chapter 13 debtors use to resolve short-term financial problems, it’s not the only way to resolve a motion to dismiss a case. Some clients simply make up the missed payments prior to the date the motion to dismiss is scheduled to be heard by the bankruptcy judge. While it is not common, simply paying the past-due amount has a significant advantage over the cure order. If the payments are made up, the trustee withdraws the motion to dismiss and then, if there are missed payments in the future, the trustee goes files another motion to dismiss - rather than simply notifying the court of a default as is the case with cure orders. So there’s no “sudden death” when a chapter 13 client who has paid the overdue payments in advance of the motion hearing date has a future default in payments.
These short-term solutions don’t change the period of time the chapter 13 is in effect and these solutions don’t reduce chapter 13 payment amounts. That’s okay when the financial problem is temporary. But some financial problems that chapter 13 debtors face during their plan aren’t temporary. When that happens, modifying the plan, or converting the case from chapter 13 to chapter 7 can be ways of resolving long-term, structural problems. That’s what I’ll write about next week.