Modification of Chapter 13 Bankruptcy Plans
October 3, 2013
By: David M. Serafin
Having spent years as a Denver and Aurora, Colorado based Bankruptcy and Tax attorney, I file plenty of chapter 13 Plans ranging in duration from three to five years for middle and higher income debtors. A bankruptcy filer with income higher than the median family income does not generally qualify for chapter 7 relief, will fail the Means Test and only is eligible for chapter 13. Other debtors file for chapter 13 to stop foreclosure, protect valuable assets (which would otherwise be liquidated by a chapter 7 trustee), eliminate a second mortgage or because they already filed for chapter 7 within the past 8 years.
Rarely ever does anybody’s financial situation remain the same over three to five years. Additional children are born, new medical debts may be incurred, people change or even lose their jobs or they may move. Because of the fact that life is seemingly always changing – for good, bad or different – it is frequently necessary to modify an already confirmed chapter 13 repayment plan to reflect a change in family finances.
The most common justification for modifying the repayment plan is job loss or income reduction. Debtors who have an income loss (albeit not drastic enough to convert to chapter 7) can file a new Statement of Monthly Income to persuade the trustee and judge to lower the portion of payments being made to unsecured creditors (i.e. credit cards and medical bills). Elderly debtors are given more leeway to stop working and not be tied into continuation of trustee payments during their final years.
Thus, prior to the original plan being confirmed I always reassure clients that they – in the case of later financial misfortune – are not bound by a plan they cannot afford. As such, the Bankruptcy Code accounts for situations whereby debtors absolutely need to reduce the payment to complete the plan and obtain a discharge of debt. Even if Means Test income remains unchanged, increased family expenses (additional children, higher medical expenses or divorce whereby housing expenses can double) can likewise reduce the trustee payment.
It is also difficult for some debtors to keep a house over the long term. Adjustable Rate Mortgages contractually increase the mortgage payment thus reducing disposable income. The mortgage servicer may have obtained Relief from Stay if post-petition payments are in default. The pre-filing missed mortgage payment may have originally driven the monthly payment in bankruptcy to be too high from the onset. Even if income and expenses are the same, a house’s failure to increase in value might mean the homeowner is upside down or has negative equity sufficient to justify surrendering the property by modifying the plan to wipe away the ensuing deficiency. Similarly, a car may be upside down and, although it previously made sense to cram down the negative equity in chapter 13, cars age over the plan duration and it later makes sense to surrender back to the lender.
The highest income bankruptcy debtors in chapter 13 – who are ineligible to eliminate debt and simply want to stop further accrual of interest, late fees, costs, etc. – are almost always required to modify the payment plan after the deadline for creditors to file claims as it’s mathematically impossible to pinpoint the exact balance of each debt when the case is filed.
Being one of the few Colorado bankruptcy lawyers with a tax background, I typically am asked to amortize non-dischargeable, priority tax debt in chapter 13. Both the IRS and State of Colorado will agree to changing the plan after confirmation to include the most recent tax liability.
Please contact me at our main office in Cherry Creek at (303) 862-9124 if you have any questions about the long term logistics of chapter 13.