Some clients at Kain & Scott run into problems making their chapter 13 plan payments because of a short-term, temporary financial problem. For people in a temporary bind, the difficulty in making a chapter 13 payment doesn’t have to spell doom for the chapter 13 case. Last week I wrote about fixes for short-term problems - catching up on back payments or agreeing to enter into a cure order - to catch up on chapter 13 payments and continue down the financial road to an eventual chapter 13 discharge of debt.
But not all financial problems are temporary. Some are long-term, structural family budget problems. And when stubborn, long-term problems come up, the success of a client’s chapter 13 plan comes into serious doubt. This week I will write about dealing with long-term problems through the modification of a chapter 13 plan.
Modifying a chapter 13 plan
The lawyers, trustees and judges who work in Bankruptcy Court understand that chapter 13 plans are just that - financial plans, made by people with financial problems, based on the individual chapter 13 debtor’s financial reality as of the date the chapter 13 case is filed. But since chapter 13 plans must provide for three years’s worth of payments, and can (for the most part) provide for up to 60 months’s worth of payments, those professionals who participate in the system every day understand that an individual’s financial circumstances will probably change (and in some case, change profoundly) while the chapter 13 plan is in effect.
So because of the recognition of that uncertainty, Congress provided for the modification of chapter 13 plans in the Bankruptcy Code. The duration of the plan can be lengthened or shortened in cases where the debtor’s income at the time of filing was below the median income for a household of the debtor’s size in the state in which the debtor lives. And the amount of the plan payments can be adjusted to better fit the new budget realities of the chapter 13 debtor.
In order to modify a chapter 13 plan, the debtor must do so in good faith and must file a plan that is affordable (feasible) for the debtor and meets the best interests of creditors (pays unsecured creditors at least as much as the creditors would receive in a chapter 7 case.
When should a plan be modified?
Chapter 13 payments are supposed to be payments made by the chapter 13 debtor out of disposable household income. So when there isn’t enough disposable income to make the plan payments, a modification of the terms of a chapter 13 plan is usually in order. At Kain & Scott, we want to modify chapter 13 plans only if the shortfall in disposable income is likely to continue - due to a permanent job loss or income reduction, or an increase in living expenses that, again, is likely to continue for the foreseeable future.
How are plans modified?
In order to modify a chapter 13 plan, the debtors have to submit amended schedules showing the change in financial circumstances in order to calculate a new monthly payment amount (if adjusting the payment is necessary), and file a modified plan, showing how the new payment amount will fund payments to creditors, and in some cases, changing the length of the plan. Plans can also be modified to surrender vehicles to lenders for which payments were being made on car loans, or to surrender the ownership of real estate to a mortgage company. Plans can also be modified to allow chapter 13 debtors to retain more of a tax refund to deal with an unexpected expense that has popped up during the life of the chapter 13 plan.
Once the debtor has a modified plan to propose, the debtor’s attorney files a motion to have the bankruptcy court confirm a modified plan. The chapter 13 trustee is served with notice of the modification, and all creditors are also served. The bankruptcy court will confirm the modified plan if no creditors or the trustee object to confirmation. Once the plan is confirmed, the debtor is still “in” the chapter 13 case, but with a different, more affordable monthly payment and the debtor can continue down the chapter 13 road toward discharge.
That’s modification. Next week I will look at the situations in which converting an existing chapter 13 case to a chapter 7 case makes sense.