What Happens If I Have a Financial Emergency During My Chapter 13?

A Chapter 13 bankruptcy is a “repayment” bankruptcy, with the goal of repaying a portion of an individual’s debts over a three to five year period.  The theory behind Chapter 13 is that a debtor should pay all they can afford over the life of the plan and any remaining unsecured debt at the end when the plan is discharged.  As a result, Chapter 13 debtors should not have extra money left over each month to save for an emergency.

Over the three to five year life of a Chapter 13 plan unexpected things happen which can cause financial difficulty.  If a financial emergency occurs during your Chapter 13, you do have options.  If the emergency is temporary, you can ask the bankruptcy court to suspend your plan payments for a couple of months and consider extending the plan length to make up the missed payments.  If the emergency is long-term, you can ask to modify your 13 plan to allow for more manageable payment terms. This is typically allowed as long as the reduced payments still pay a certain percentage of unsecured claims.  If the financial emergency is very serious and not likely to be rectified in the near future, you may qualify for a “hardship discharge,” which means you receive a discharge without completing all the plan payments.  However, a hardship discharge is reserved for those in dire straits and comes with conditions, so discuss your situation with trained bankruptcy counsel.

Conversion to Chapter 7 bankruptcy might be an option if you can no longer make plan payments but don’t meet the standards for a hardship discharge.  If you decide to convert to Chapter 7, you will have to file updated bankruptcy schedules and attend another “first meeting of creditors.”  Any new debts incurred since filing a Chapter 13 case can be included in the Chapter 7 bankruptcy and will normally be discharged at the conclusion of the Chapter 7 case.  However, not all debtors qualify for Chapter 7, so talk with your bankruptcy counsel to make sure this option is right for you.

Financial circumstances change during a Chapter 13 case and the bankruptcy code is designed to give the flexibility needed to allow you to manage the ups and downs during the three to five years a plan exists.  The most important thing is to maintain communication with your bankruptcy counsel and address problems before they get out of hand.


5 Replies to “What Happens If I Have a Financial Emergency During My Chapter 13?”

  1. Good answers. We just need to be caurfel not to cross the line into telling them how to fix it. Many folks indicated they would ask how the team would get the late comer caught up. I’ve worked with teams that they realized the team member was not a vital part of the team and ask them to step off the team. I’ve worked with other teams that they have decided that the person could listen quietly until they caught up on their own. And I’ve worked with other teams where the decided a 5 minute recap would be good for the entire team. Each team needs to determine what will work best for them.As coach my questions would be: We have a team member that will be 2 hours late what is the impact on the team? How do we want to handle it? Based on what they say my next question would be something along the lines How will you make that happen? Happy CoachingBea

  2. I definitely agree with all the coemmnts that lead us to trust the team to decide how to handle the absence and re-integration of the team member. Also, I like the questions that focus attention on how we define an emergency as a group. I would also ask some future oriented questions about what our guidelines should be in the future when a crisis pulls a team member away. What norms will the team agree to with regard to cancellations? Would it be appropriate for the missing person to send an appointed replacement for one session? How does a missing member impact our progress? How will absent members be informed of session outcomes? How can we inform our supervisors about the importance of being fully committed to the Action Learning process? and so on.

  3. This is a very helpful article. Thanks for sharing this. I think that this article must be read by a lot of people especially those business owners who are in Chapter 13. This will definitely give them an idea.

  4. I totally agree with what you said. I think that it is very important to always consult to professionals to handle situation well especially if you are in Chapter 13. Thanks for sharing this article.

  5. Yes, I agree with what you said. The most important thing is to maintain communication with your bankruptcy counsel and address problems before they get out of hand. I think that by doing this, we can definitely avoid issues or problem. Thanks for sharing this article.

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