You have filed for Chapter 13 Bankruptcy and now your financial situation has changed and you can’t make the payments. What are your Options?
1) You can simply allow the Chapter 13 to be dismissed. This is not a good option, especially if you are stripping a second mortgage. All of the payments you made through the plan will be applied to your debt; however, you will still owe the balance to the creditors and the Trustee fees and Attorneys fees will not be recovered.
2) You can convert the case to a Chapter 7, provided you qualify for a Chapter 7. (We will discuss this in a separate Blog Post)
3) You can modify the plan to adjust the payments to your new income level or
4) You can petition the Court for a Hardship discharge.
The benefit of a hardship discharge is that it works just like a Chapter 13 but you get your discharge before the end of the 36 or 60 months. Also, if you have paid 70% of the unsecured creditors through the plan, it will not prevent you from filing a subsequent Chapter 7 within 8 years, as would be the case with a converted Chapter 7.
In order to qualify for a hardship discharge you need to meet the following conditions:
1) You are unable to continue making the payments due to circumstances beyond your control.
2) The payments made so far in the Chapter 13 are at least as much as each creditor would have received in a
Chapter 7 and,
3) The repayment plan can’t be modified to allow you to continue making payments at a lower amount.
Michigan Bankruptcy Courts have held that a loss of employment may meet the first part of this test, provided the these economic circumstances were not foreseeable at the time of the plan confirmation and were beyond the debtors control despite his or her best efforts. In order to meet this test you need to present evidence of the following:
a) that the economic circumstances were not foreseeable at the time you had your 13 plan confirmed.
b) what your employable skills are
c) that there is no work available in the same or comparable trade for a person with your skills
d) that you have used your best efforts to obtain employment using your particular skills and
e) the availability of other employment and that you have not been able to obtain employment despite your best efforts.
In the current Michigan economy, a Chapter 13 hardship discharge may not be that difficult to prove.
