Chapter 13 is a form of bankruptcy relief by which the debtor pays off a portion of what is owed to unsecured creditors over a period of three to five years. Once the repayment plan is completed, the balance of those debts are discharged. However, a major problem can arise when the debtor cannot consistently meet the plan requirements.

If you file for Chapter 13, you estimate your income and expenses several years in advance. But things can go wrong and you may have unexpected expenses or reductions in income. In addition, the Chapter 13 process doesn’t allow debtors to amass a large cushion of savings for emergencies.

One consequence of your defaulting on payments is that creditors may obtain relief from the automatic stay that went into effect upon the filing of the Chapter 13 petition. They can take action to collect on the debts by attaching your property.

Your options in the event of a payment shortfall depend on the reason for and size of the default. If you have a temporary financial setback, the bankruptcy trustee might permit a short forbearance. For example, if you are unable to make the monthly plan payment due to an unusually high medical expense, the trustee might let you make up the default or cure the plan. If you likely will miss several payments, causing a significant arrearage, the court may allow you to modify the plan, such as by reducing the payment amount and/or increasing the plan duration.

If your inability to pay is chronic or severe in nature, a Chapter 13 bankruptcy may no longer viable. The case may be dismissed if you lose your job with little hope of finding a new position at comparable pay. Even if a Chapter 13 case is dismissed, the bankruptcy court has the authority to reinstate it in appropriate circumstances, although this will require making up the payments that were missed.

Another alternative if your Chapter 13 fails is to apply to the court to convert the case to a Chapter 7 bankruptcy, known as a liquidation. Qualifying for Chapter 7 requires passing a means test to show you have insufficient disposable income to pay off creditors. If you pass the test and complete the Chapter 7, the majority of your debt will be discharged and you will be able to make a fresh start.

It is also possible to file a new Chapter 13 right away. However, if your original case was dismissed with prejudice, you might have to wait six months to refile. In addition, the automatic stay upon refiling will be limited to 30 days unless the court extends it.

The Law Offices of James C. Zimmermann serves debtors in bankruptcy matters from five locations across Sussex, Bergen and Passaic counties, New Jersey. Call 973-764-1633 or contact us online for a free initial consultation.