Late Payments on Chapter 13 Bankruptcy: Now What?

Chapter 13 bankruptcy is a reorganization of debts, allowing you to repay all or some of your debts over time through a repayment plan. It is often considered preferable to the alternative, chapter 7 bankruptcy, as it allows you to keep all of your assets and avoid any foreclosure or loss of assets. However, depending on the structure of your plan, some people may find it difficult to keep up with the plan payments. So, what happens when your payments are late? Let’s find out.

An Overview of Chapter 13 Bankruptcy Payments

First, let’s take a look at exactly how chapter 13 bankruptcy payments work. Generally, the process will look like this:

• The debtor drafts and proposes a repayment plan. This can be done with the help of a bankruptcy attorney. 
• The court and trustee review the plan and schedule a hearing.
• At the hearing, the court can either approve or reject the plan.
• If accepted, the debtor begins making monthly payments to the trustee, who then distributes these payments to creditors. The trustee is appointed by the U.S. Trustee and is an impartial individual.
• The debtor continues making these monthly payments until their debts are repaid. At this point, the case is discharged.

This repayment plan usually takes 3-5 years to complete, with the exact time frame being determined by the debtor’s income level relative to the state median-income level. 

What Happens If My Chapter 13 Payment Is Late?

A late payment should be avoided if possible. After one missed payment, the bankruptcy trustee can file a motion to dismiss. If the court grants the motion, your bankruptcy is dismissed and you’ll no longer qualify for a discharge of debts. If this happens you will have to begin paying your creditors again or risk legal action against you.

How Late Can You Be on a Chapter 13 Payment?

You cannot be late on chapter 13 payments at all. This is because there is no grace period for chapter 13 payments. If you do not make a payment by the scheduled due date, it is considered late. In many cases, if a payment or two is late, the case will remain intact as long as the plan is made current before the scheduled hearing to dismiss the case. 

Late Mortgage Payment During Chapter 13

Late mortgage payments during a chapter 13 bankruptcy can result in the loss of your home. After you’re late on a few mortgage payments, your lender can ask the court for permission to foreclose. The lender makes the request by filing a motion asking the court to lift the automatic stay that prohibits collections when you file for bankruptcy. In these cases, the court will likely grant permission and the foreclosure process will begin unless the mortgage payments are immediately paid.  Your lawyer would have to answer the motion on your behalf and try to work out an arrangement with your mortgage lender.  

Options If You Fall Behind on Payments

While it is ideal to not miss your chapter 13 payments, sometimes it simply cannot be helped. Fortunately. If late payments cannot be avoided, you do have options.

Request a Hardship Discharge

The first option to consider is a hardship discharge. This is only available to Chapter 13 bankruptcy filers who cannot complete their repayment plans due to circumstances beyond their control. When a hardship discharge is granted, all remaining debts are discharged, even if you haven’t fully repaid them under the terms of the original plan. To qualify for a hardship discharge:

• Circumstances must be beyond your control.
• Modification of the plan is not feasible.
• Creditors have been paid what they would have received in a Chapter 7 filing.

If all of the above pertain to your case, a hardship discharge will usually be your best option.

Contact Your Trustee

Contacting your trustee is the first thing you should do when a late payment is unavoidable. Do not wait to do this. It is best to inform them as soon as you anticipate the payment will be late, not days after it already is. Your trustee may allow a slightly late payment or they may be willing to work with you to modify your repayment plan.

File a Motion to Modify the Plan

After contacting your trustee, you can request to modify your chapter 13 repayment plan. This is done by presenting the court with proof of a change in circumstances which make the payments under your previous plan untenable. You will also propose a new plan that is more inline with what you can afford. If accepted, you will resume making payments as outlined under the new plan. 

Convert to Chapter 7 Bankruptcy

It is possible to convert to chapter 7 bankruptcy from chapter 13. This should only be done when you are certain that you cannot afford chapter 13 payments any longer. To convert, you must file a Notice of Conversion with the court and pay a conversion fee of $25. You will then be appointed a new trustee to handle your chapter 7 case. This trustee will be responsible for managing the sale of your assets and distributing the proceeds to creditors. 

How to Avoid Late Payments

There are some steps you should take to avoid late payments. These include:

• Budgeting: Create a strict budget that prioritizes your chapter 13 payments and stick to it. This will prevent you from overspending and not having the funds to make your monthly payment.

• Setting Reminders: Mark it on your calendar, set a phone alarm, or whatever works for you. This will prevent accidentally missing a payment. 

• Set Up Autopay: The best way to avoid accidentally missing a payment is to set up autopay. As long as you keep funds in your account, you’ll never miss a payment.

By following these steps you can avoid late payments, make it through chapter 13 bankruptcy, and begin rebuilding your financial health.