Can You Modify Your Chapter 13 Repayment Plan if Your Income Changes?

The main purpose of a Chapter 13 case is to obtain a confirmed repayment plan.  A Bankruptcy Court Order that confirms a repayment plan is like a new contract between yourself and your pre-petition creditors.

The Bankruptcy Code maintains a disposable income test, which is a review of your current monthly income less your monthly expenses as to you can budget for a monthly payment.  The Bankruptcy Code also has what is called a Means Test, which calculates your projected monthly income by averaging the past six (6) months of your income as compared to the median family income for the number of people and dependents who reside in your household.  After calculating your projected disposable income, then you subtract standard IRS deductions and your monthly secured debt payments in order to calculate what you must repay your unsecured creditors in order to obtain a Discharge Order.

If there is a dispute as to your disposable income, an objection is typically raised by a creditor or trustee administering your case, then it may result in a Confirmation Hearing, whereby evidence and testimony is presented to support or oppose whether your proposed repayment plan is confirmable under the Bankruptcy Code.  The Judge will either sustain the objection directing you to file an Amended Repayment Plan to increase your payment, or overrule the Objection to enter an Order confirming your proposed repayment plan.

However, a question sometimes arises after you have obtained a confirmed plan when your income suddenly decreases  during the lifetime of your repayment plan, can you later decrease your plan payments?

A Chapter 13 repayment that once fit comfortably into your budget can become difficult to manage when your income suddenly drops. Maybe your hours were cut, you lost your job, or your household expenses increased. If your finances have changed, you may be wondering: “Do I have to keep making the same payment?” Not necessarily. In some circumstances, you may be able to modify your Chapter 13 repayment plan to better reflect your current financial situation. Here’s what you should know.

Can You Modify a Chapter 13 Plan?

Yes. Section 1329 of the U.S. Bankruptcy Code allows a confirmed Chapter 13 plan to be changed before the plan payments have been completed. A change in income may support a modification when it affects your ability to make the existing payments.

For example, if you lose your job, have your hours cut, take a lower-paying job, or face a significant change in your household income, it can significantly affect your budget. Increased costs, such as medical expenses, health insurance premiums, or childcare, can also make it hard to stick to the original payment. In such cases, you might be able to modify the plan to suit your current financial situation.

A proponent of modification of placement bears the burden of proof to propose why the confirmed plan should be modified.

Another reason you may need to modify your repayment plan is to include post-petition mortgage arrears if you get behind on your mortgage during the course of your repayment plan.  Courts have found that it is permissible to modify your confirmed plan to include post-petition mortgage arrears.  See e.g., In re Smith, 631 B.R. 374 (Bankr.N.J. 2021).

What Happens When Your Income Goes Down?

A drop in income doesn’t mean your Chapter 13 payment will automatically decrease. Generally, you need to get the court’s approval for any proposed changes to the plan and provide updated financial information to support your request.

If approved, a modification can reduce your monthly payment going forward. However, it will not affect payments you have already made. Depending on the circumstances, the plan may also be extended, but a modified plan generally cannot extend beyond the maximum Chapter 13 repayment period measured from the start of the original plan payments.

What if Your Income Increases?

A change in income does not always work in the debtor’s favor. Section 1329 also allows the trustee or an unsecured creditor with an allowed claim to seek an increase in plan payments under certain circumstances. Therefore, significant financial changes should be discussed with your bankruptcy attorney rather than ignored.

The Law Office of Adam R. Weaver, Esquire has previously litigated this issue before in the case of In re Eckert, 485 B.R. 77 (Bankr.M.D.Pa. 2013) (trustee’s post-confirmation motion to modify denied when court found increased income of 36% attributable to mandatory overtime not substantial or unanticipated change).

What Should You Do if You Cannot Afford Your Payment?

Do not simply stop making Chapter 13 payments when your income reduces. Falling behind can put your bankruptcy case at risk of dismissal or other consequences. Instead, contact your attorney as soon as you anticipate that your income or expenses will make the current payment unaffordable.

Gather recent pay stubs, employment records showing reduced hours or job loss, documentation of new expenses, insurance information, and other records showing how your finances have changed. Your attorney can evaluate whether a modification is feasible and help determine what steps should be taken.

An important thing to note is that other options may sometimes be available when a modification cannot solve the problem, including a hardship discharge or conversion to Chapter 7, depending on your circumstances and eligibility. These alternatives have specific legal requirements and should be evaluated carefully.

Contact a Pennsylvania Bankruptcy Attorney

If your income has changed during your Chapter 13 bankruptcy, our Lehighton & Carbon County bankruptcy attorney, Adam R. Weaver, can review your finances, explain whether a plan modification may be an option, and help you pursue the appropriate option. Contact us today for personalized legal guidance about your case.

Source:

law.cornell.edu/uscode/text/11/1329