Chapter 13 bankruptcy proceedings can allow individuals and married couples to negotiate and reorganize their consumer debts to gain a fresh financial start. But for those who are still working on a Chapter 13 repayment plan, unforeseen bumps in the road can send even the most comprehensive bankruptcy repayment plan off-course.
Fortunately, there are allowances for these types of material financial hardships that can help you stay on track. Learn more about how material financial hardships can be accommodated and what you’ll need to show to get relief.
The Chapter 13 Process
Chapter 7 bankruptcy involves discharging all or many of your consumer debts, eliminating your repayment obligations once the bankruptcy has concluded. Chapter 13 bankruptcy, on the other hand, will require you to repay all or most of your debts—though it can also give you the tools and negotiating power you need to reduce these payments and get your budget back into good shape.
After you file for Chapter 13 bankruptcy protection, you’ll work with the trustee to develop a plan to repay all or part of your debts over a three- or five-year period. The length of your Chapter 13 repayment plan will largely depend on your total amount of debt and your income; generally, the higher your income and the lower your debt, the more quickly you’ll be able to finish repayment and “graduate” from your Chapter 13 plan.
The CARES Act Changed Bankruptcy Laws
In early 2020, the CARES Act temporarily expanded several provisions of the Chapter 13 process, including a new allowance for modifications to a Chapter 13 repayment plan if the debtor is dealing with a COVID-related material financial hardship. The modification allowance can allow the debtor to extend the term of a typical Chapter 13 repayment plan where needed, providing a bit of extra time and breathing room.
Bankruptcy attorneys expect that this change will require Chapter 13 creditors to work with debtors and trustees to authorize regular payment deferments and extensions. And though few challenges to the CARES Act’s bankruptcy changes have wound their way through the court system at this early stage, it seems likely that bankruptcy courts will allow debtors to defer ongoing real estate payments (like mortgage and rent) so long as there’s some plan to pay arrearages as well.
Other bankruptcy-related changes that were put into place by the CARES Act include:
- Modifying the definition of “current monthly income” to exclude payments relating to the national COVID emergency. The income exclusion covers the several stimulus payments that were issued to many households in 2020.
- Modifying the definition of “disposable income” to exclude the same payments.
Lawmakers hope that these changes can help temper the financial impact of the COVID-19 pandemic, avoid penalizing debtors for using these stimulus funds for needed expenses, and keep Chapter 13 debtors on the right repayment path.
What Constitutes a Material Financial Hardship
Under the CARES Act, material financial hardships can be either direct or indirect. Direct hardships, as the name implies, are those where the connection between the injury and the damage is clear and straightforward—for example, losing your job because your employer shut down during the pandemic, or losing your ability to work at all because you’re suffering from long-term COVID symptoms.
Indirect hardships can be tougher to suss out. For example, you may be able to show that you’re losing income—while not being able to show that this loss of income is COVID-related. Absent some evidence that the hardship was triggered by the pandemic, you may not be able to get relief. Fortunately, bankruptcy courts have fairly broad discretion to assess whether a particular situation constitutes a material financial hardship that would warrant modifying the repayment plan, and you may also have the opportunity to appeal this decision.
Seeking Modification of Your Chapter 13 Plan
If you’re a debtor, were making payments in accordance with an approved bankruptcy plan pre-COVID, and have experienced a COVID-related financial hardship, you may be able to modify your Chapter 13 repayment plan to improve your odds of long-term success.
Modifying your plan will first require you to file a motion to modify with the bankruptcy court. This motion must be served to all your creditors along with the bankruptcy trustee, and must include:
- A detailed written declaration about why your payment should be reduced or your repayment term should be extended.
- A proposal for a new Chapter 13 repayment plan.
Both the bankruptcy trustee and your creditors may review your proposed plan and lodge any objections at that time. These objections will be taken to the bankruptcy judge, who will decide which party has the stronger argument based on the facts of the case and the law in general and rule accordingly.
Just like your original payment plan considered multiple factors in arriving at a repayment amount and schedule, so should the modified plan. These factors to consider include:
- Your gross and net household income
- The types of debts you have (e.g. student loans, a mortgage, credit cards, child support or alimony, or an auto loan)
- The expenses you have and whether they’re negotiable or non-negotiable
- Whether you own any nonexempt property (i.e. property that can’t be excluded or exempted from the bankruptcy estate)
If your debts tend to include obligations that are required to be paid in full (like back taxes, child support, and alimony), you may not have too much wiggle room when it comes to reducing your payments. But for medical and credit card debt, personal loans, auto loans, and other types of non-secured debt, lowering your payment may be possible.
Discharging Debts After a Chapter 13 Plan Fails
Although the discharge of one’s debts is most commonly associated with Chapter 7 bankruptcy plans, it can serve as a sort of failsafe for Chapter 13 debtors as well. If you’re suffering from any financial hardships that were caused by COVID and these hardships have caused you to default on up to three of your mortgage payments after March 13, 2020, you may qualify to have certain debts discharged.
You might also qualify for a discharge of some debt if you’re behind on your mortgage payments but are able to enter into a forbearance agreement or loan modification with your lender. Forbearance agreements can allow you to postpone your payments while you get back on your feet, but don’t do anything to change the total amount due. And loan modifications can modify the terms of the loan, including the payment amount and due date—but again may not always go far enough when it comes to reducing your debt load. By discharging some of your debts, you’ll be better able to stay on track for prompt repayment of the others.
The discharge decision is entirely within the bankruptcy court’s discretion, and—though it’s triggered by a default on mortgage debt—it doesn’t actually include any discharge of the mortgage debt. Instead, the debtor can receive a discharge on other debts, like auto loans, credit card balances, and personal loans. But debtors who hope to take advantage of this CARES Act provision should act quickly; unless Congress takes action to expand this deadline, the discharge provision will sunset on December 27, 2021.