The goal of the Chapter 13 repayment plan is to obtain a confirmed plan early on, make payments to the Trustee to pay your creditors and, ultimately, receive a discharge (perhaps 3-5 years later in many cases). Unfortunately, it is not uncommon to see Chapter 13 cases on the Trustee’s motion to dismiss calender. This means that for one reason or another, the Trustee is asking the Court to dismiss the Chapter 13 case. Often the reason for the request is due to falling behind in your Chapter 13 payments. There are many ways to address these missed payments. The best option will take into account why you fell behind in the first place, perhaps a reduction in income due to a lost job, temporary sickness, etc.
The following are some options for you to consider:
1. Modify the Chapter 13 plan to try to reduce the monthly payment and/or the percentage to be repaid to the unsecured creditors. At the time of the motion to dismiss, you can look to see what creditors filed claims in your case. If the time has expired for all creditors to file claims, then you know that no additional claims are anticipated and you can see if the monthly payment can be reduced to the Trustee if the claims filed are less in amount than expected when you first filed your Chapter 13 plan. Similarly, your income may have decreased after you filed your plan and, therefore, it may be possible to reduce the percentage to be paid back to unsecured creditors, if your disposable income is what was controlling the percentage repayment that you were initially approved at when the Court first confirmed your plan.
2. Convert the case to Chapter 7. Often conversion from Chapter 13 to Chapter 7 is a great option. One thing to watch for is whether any assets you have would be at risk in a Chapter 7. Even if there are such assets, if the amount of equity in them is not very large, e.g. $3,000 or less, a payment plan with the Chapter 7 Trustee may be able to be worked out in which you repay this amount over a 1-year period on a monthly basis. In this way, you will not have to be concerned with the risk of a continual Chapter 13 motion to dismiss for non-payment. Rather, you convert to Chapter 7, obtain your discharge, and erase the unsecured debts that were problematic for you. Of course, this will not take care of some debts such as unpaid mortgage payments or non-dischargeable IRS debts that were being treated in the Chapter 13 plan. Perhaps an offer in compromise can be used to address the IRS debt, and a mortgage modification or later Chapter 13 case can address the missed mortgage payments.
3. Dismiss Chapter 13 and File a New Chapter 13 Case. Sometimes a Chapter 13 case is what is in your best interest but a modification of the existing Chapter 13 case is not enough. It may be that efforts to modify the existing plan simply is not sufficient. You’ve run out of time to accomplish your goals to make the required payments in the existing Chapter 13 case. In this situation, dismissing the 13 case and refiling a brand new 13 may be the best option. This will provide you with a new period of time — up to 5 years — to repay your debts.
So, if mortgage arrears from your first 13 were not completely paid (and perhaps you even accumulated more mortgage arrears after the filing of the Chapter 13), then this option may be beneficial. It will provide a new 5-year period and, thus, may allow you to reduce your monthly payment to the Trustee from what you had been paying.
4. Dismiss Chapter 13 and File a New Chapter 7. You can also dismiss the case and file a brand new Chapter 7 case. You may wonder: “Why not just convert the case? It would be less expensive to keep the same case in terms of attorney fees and filing fees.” While there is truth to that, there are other advantages to simply dismissing and re-filing a brand new case in Chapter 7.
For example, if at the time of the original Chapter 13 the means test reflected that you were above average income, upon conversion of your Chapter 13 to a Chapter 7, you may have problems or more difficulties explaining why you should remain in Chapter 7. It is sometimes easier to simply dismiss the case and refile a brand new Chapter 7 case if looking back today, the means test amount for your new Chapter 7 filing would be below average income (as distinct from your earlier Chapter 13 filing when you were at an above average income amount). The change may be due to a decline in income that may only be temporary, but does not get picked up on the new Chapter 7 means test. This may allow you to get a discharge in a 7 when you otherwise would not or would not without difficulty.
5. Dismiss Chapter 13 and File a New Chapter 13 for Spouse 1 and Convert to Chapter 7 for Spouse 2. Consider the joint Chapter 13 case of a husband and wife who fall behind in plan payments and are facing the Trustee’s dismissal request. If one spouse, say the wife, is expecting an inheritance from a relative, and she has already gone past the 180-day period after the filing of a bankruptcy case in which a Chapter 7 Trustee could look at an inheritance as an asset for the Chapter 7 estate, then it may be beneficial for the wife to convert the case to a Chapter 7 at this point in time since she has already gone past the critical period of 180-days. In this way she will not risk dismissing the 13, filing a new 7 case, and then a relative dying within 180 days thereafter, which would require her to give up all the inheritance to a Chapter 7 Trustee. If the husband would not inherit anything, he may wish to simply dismiss the case, and perhaps refile a Chapter 13 case to deal with any unpaid mortgage arrears on the house, etc, while the wife is in a Chapter 7 seeking a discharge of her general unsecured debts (with no risk of losing her inheritance to the Chapter 7 Trustee).
6. Remove Claims of One Spouse to Make Plans More Affordable. Another possibility would be removing the debt of one of the spouses by either dismissing or converting that spouse to a Chapter 7 (if this spouse otherwise qualifies for Chapter 7 relief), and keeping the remaining spouse in the Chapter 13 case that the Trustee was seeking to dismiss. By taking out one spouse’s debts in this way, the other spouse may be able to finish a Chapter 13 case and obtain his discharge. This may be helpful where the spouse that is converting has a lot of tax debt which then gets removed from the Chapter 13 case, and the spouse remaining in Chapter 13 will be able to finish the plan as there is now a less significant a balance in the plan. The spouse that converts can then either refile a Chapter 13 after to deal with the tax debt or set up an installment agreement or enter into a tax offer-in-compromise with the government outside of bankruptcy.
So there are a lot of options if you fall behind in Chapter 13. Each case is unique. The key is not to get distressed. Rather, speak with an experienced bankruptcy attorney who can obtain a full understanding of your particular facts in order to provide you with particular advice about which option is best for you. Too often I see a husband and wife filing together when they would be better served filing separate. Sensitivity to one’s unique circumstances is essential to make decisions that are in your best interest when in bankruptcy.