Chapter 13 Bankruptcy: A Lot Can Happen in 3 to 5 Years

A document titles Chapter 13 Bankruptcy. A pen lays on top of the paper.

When a person files for Chapter 13 bankruptcy, then automatic stay takes effect, which prohibits all collection activities against the individual. This gives the bankruptcy filer, or “debtor,” some breathing room to devise a Chapter 13 payment plan that typically spans the course of 3 to 5 years. This Chapter 13 plan allows the debtor to reorganize their debts, catch up on missed payments such as mortgage arrears, car arrears, and tax debt, and pay down some of their obligations, along with ensuring they can afford their regular monthly bills.  However, as the old saying goes, the best-laid plans of mice and men often go awry. A lot can happen in 3 to 5 years: Chapter 13 involuntary dismissal, modifications to the payment plan, a hardship discharge, converting to a Chapter 7 bankruptcy, relief from the automatic stay, and much more. So, let’s dive in.

Chapter 13 Bankruptcy & What Can Happen in 3 to 5 Years 

In a Chapter 13 bankruptcy, the Chapter 13 payment plan lasts between 3 to 5 years. The actual length of the plan depends on three primary factors.

  1. The filer’s disposable monthly income;
  2. How much time is required to pay back the debt;
  3. The type of debt that must be paid back in the Chapter 13 plan

However, a lot can happen in 3 to 5 years that can affect the Chapter 13payment plan.

Loss of Income & Chapter 13 Involuntary Dismissal

A Chapter 13 payment plan assumes that the debtor has regular income to pay down debts, as well as regular monthly bills, such as mortgage or rent, utilities, car loans, insurance, etc. If a person in a Chapter 13 plan loses their job, becomes ill, or is seriously injured, they may no longer have access to a steady income and, as a result, can no longer afford their monthly payment plan. In instances like this, the Chapter 13 trustee can ask the Court for the case to be involuntarily dismissed. However, the debtor may also be able to modify their payment plan in some situations.

Altering the Payment Plan When Circumstances Change

Throughout the course of 3 to 5 years, circumstances often change. We already addressed one scenario – Chapter 13 involuntary dismissal as the result of a loss of income – but there are several other instances that may affect the payment plan as well. 

  • Initially, a debtor may be hesitant to turn over collateral, such as giving up their home or vehicle. However, if they are later unable to keep up with both their auto loan and/or mortgage and the arrearage payments, the debtor may choose to turn over collateral, which could allow them to modify their plan.
  • When a debtor suffers a short-term financial issue, such as loss of employment, the debtor can request a temporary suspension of their Chapter 13 plan payments. This gives the debtor a short break from having to make their monthly Chapter 13 plan payments.. However, regardless of the length of the break, all Chapter 13 plan payments must still be made within the original 3 to 5 year window, which may mean that after the break, the Chapter 13 plan payment must increase
  • Sometimes, a debtor may suffer a long-term financial issue. This can happen when a person has to take a lowering-paying job, affecting the monthly income that was originally used when creating the Chapter 13 payment plan. In situations like these, if the debtor is in a plan that is less than 5 years, they may be able to extend the length of the payment plan to the full 5 years.

When circumstances change, it is possible to modify the Chapter 13 bankruptcy payment plan with the Court’s approval. Following a motion to modify the plan, the court and Chapter 13 trustee will typically request proof of your new circumstances and, if satisfied, they can order a new plan payment for the duration of the case.

Requesting a Hardship Discharge

When a debtor can’t complete their Chapter 13 payment plan because of an unexpected event, such as a long-term loss of income, they may be able to request a hardship discharge to release debts early. This requires the following three conditions to be true.

  1. Circumstances beyond the debtor’s control, for which they should not be held accountable, have affected their ability to complete the Chapter 13 payment plan. It is the debtor’s responsibility to prove the circumstances are not just temporary – such as a job loss or illness – but long term. 
  2. Unsecured creditors have received adequate payment at least equal to what they would have received in a Chapter 7 bankruptcy. 
  3. Modification of the debtor’s Chapter 13 payment plan is not practical. This requires proving that the debtor would still not be able to meet monthly payments in a modified plan.

If the court grants the debtor’s motion for a hardship discharge, only unsecured non-priority debts are discharged. 

Convert to a Chapter 7 Bankruptcy

If a debtor does not qualify for a hardship discharge, they should then consider converting to a Chapter 7 bankruptcy.  However, before conversion, the debtor must understand the impact that a Chapter 7 bankruptcy may have on their assets. For example, if you own real property or a vehicle that has equity, the Chapter 7 trustee may wish to sell those and distribute the proceeds to creditors. However, this is not always the case, as many times property either has no value to the Bankruptcy Estate, or the property can be exempted.

Creditor Files a Motion for Relief from the Automatic Stay

There are instances when a creditor can request relief from the automatic stay and continue collection efforts. This is most common from mortgage and car lenders. After the motion, the debtor and any other interested parties have the opportunity to file an opposition to motion and for a hearing. Typically, the judge will grant the motion for relief from the automatic stay if…

  1. The debtor has not been making their agreed-upon payments, and
  2. The debtor has not proposed a modification to the Chapter 13 bankruptcy payment plan

However, all is not lost when a creditor files a request for relief from the automatic stay.  Many times, the lender will allow the debtor to pay back the missed payments over the next several months, in addition to making the regular payments.

Questions About Chapter 13 Bankruptcy?

Steiner Law Group is a boutique law firm that assists Maryland citizens with bankruptcy and financial restructuring services. We have helped hundreds of individuals, families and businesses discharge millions in debt.

If you have questions about Chapter 13 involuntary dismissal and bankruptcy, please schedule a risk free consultation or contact Steiner Law Group, LLC a Baltimore, Maryland law firm at (410) 670-7060 to learn more about bankruptcy options.

Avatar of Eric Steiner, Esquire

About Eric Steiner, Esquire

Mr. Steiner graduated from the University of Michigan Law School in 2006. Since then, he has focused his practice on bankruptcy, real estate, commercial and consumer collections, including representing the third largest lender in the greater Baltimore area.