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What Happens if You Miss a Payment in Chapter 13 Bankruptcy?

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For individuals with overwhelming debt and significant income or assets, Chapter 13 bankruptcy can provide a path to a financial reset. Chapter 13 is also called "reorganization bankruptcy" because rather than discharging your debts immediately, it reorganizes your debts into a repayment plan with an affordable monthly payment. These payments are made to the bankruptcy trustee, who then distributes them to your creditors. After you make those payments for 3 to 5 years, your remaining debts are discharged.

But what happens if you miss a payment? If you can't keep up with the repayment plan, then your path to a financial reset may become significantly more complicated. Below is general information on what might happen and what you might be able to do in this situation. For specific advice, contact our offices right away to speak with an experienced bankruptcy lawyer.

Missing a payment can cause your case to be dismissed or converted to Chapter 7

As long as you keep making your monthly payments in Chapter 13, the case proceeds more or less on autopilot. The trustee gets the money and distributes it to your creditors as specified in the bankruptcy court's order. However, if a payment is late or missed, then the trustee doesn't have the funds to pay your creditors—and you are now in breach of the plan.

By law, if you miss a payment, the trustee can now file a Motion to Dismiss for Material Default, which asks the bankruptcy court to dismiss your Chapter 13 case. Once that motion is filed, the court will schedule a hearing, in which the bankruptcy judge will ask for an explanation and then decide on a resolution. The court has a few options to resolve this motion:

  • The court can dismiss your Chapter 13 case entirely. In this situation, you are generally eligible to re-file, but you have to start over.
  • The court can modify your Chapter 13 repayment plan, for instance by granting an abatement or adjusting the monthly payment.
  • The court can also convert your case to Chapter 7. This gets rid of the repayment plan, but it also means the trustee can sell your non-exempt assets to repay your creditors.

Legally, there is no grace period in Chapter 13; a single missed payment is enough for the trustee to file that Motion to Dismiss. As a practical matter, many trustees will wait until after the second or even third missed payment, but you can't afford to take that risk. If you know you're going to be late or unable to make a payment, it's your responsibility to reach out to the trustee (or, better yet, your attorney) and work out a solution.

What are your options if you can't keep up with the payments?

Chapter 13 bankruptcy is intended to provide a path out of debt. If your circumstances have changed such that the path the court put you on is no longer viable, for instance, due to a loss of income or unexpected medical issue, then the trustee and the court are often willing to make adjustments, but you have to ask for them. Some possible solutions include:

  • Work out a repayment plan with the trustee. If your financial hardship is temporary, many trustees will be willing to work with you to catch up on your payments. This can be a simple solution if your financial situation allows, but you have to make the catch-up payments in addition to your regular monthly payments, which can put a significant strain on your finances.
  • Ask the bankruptcy court for an abatement. Another option if you have a temporary financial hardship is to ask the court for an abatement; that is, a temporary reprieve from your monthly payments. This works best if you are dealing with unsecured debt.
  • Amend the repayment plan. If you have a permanent change in income or expenses, then the court may be willing to adjust your Chapter 13 repayment plan on a permanent basis. This can lower your monthly payment or make other appropriate adjustments to make the plan more affordable.
  • Convert to Chapter 7. As mentioned above, this is one of the court's options when considering a Motion to Dismiss, and it may be in your interest. If your income has dropped to the point where you now pass the Chapter 7 means test, converting to Chapter 7 can get you out of the repayment plan and get your debts discharged right away.
  • Let the bankruptcy court dismiss the case. In some circumstances, it may be in your interest to just have your Chapter 13 case dismissed and then re-file. Again, don't just let this happen; get legal advice first.

Which solution works best in your situation depends on a number of factors, including:

  • Which bankruptcy court and which trustee you're dealing with.
  • How far behind you are on your payments.
  • What types of debts you are repaying.
  • The type of repayment plan.
  • The length of the repayment plan.
  • The nature of the financial hardship and whether it's permanent or temporary.

In short, there is no one-size-fits-all answer if you can't keep up with your payments. You need to talk to your lawyer to make a plan of action.

Talk to your bankruptcy attorney right away if you can't keep up with your payments

Many debtors are surprised to learn that the trustee will not notify their attorney of a missed payment. You have options in this situation, but you need to get legal advice right away. Once the bankruptcy trustee has filed the Motion to Dismiss, it becomes harder to fix the problem. The sooner you talk to your attorney, the easier it is to find a solution that works for you.

If you've missed a payment or anticipate that you will not be able to make a payment, be proactive. Reach out to your Chapter 13 bankruptcy attorney today to get advice on your specific situation.

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Columbia, SC 29201

Phone (803) 799-1700
Fax (803) 728-6718

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Rock Hill, SC 29730

Phone (803) 909-9377
Fax (803) 728-6718