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Handling A Drop In Income During Chapter 13

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Mark Cappel
UpdatedJun 17, 2024
Key Takeaways:
  • In a Chapter 13, most assets are protected from creditors.
  • Chapter 7 allows debtors to discharge most unsecured debts completely.

What if one experiences job loss during a Chapter 13 filing and cannot make payments as outlined in the plan?

Since the initial plan is based on one's income, what if one experiences job loss during a Chapter 13 filing and cannot pay the bankruptcy payments as outlined in the plan?

Because the financial circumstances under which you filed your original Chapter 13 petition have changed significantly since you filed the petition (i.e., you lost your job, and presumably your primary source of income), you may be able to modify your petition, or have it dismissed altogether, allowing you to file a new case with lower payments to the change in your financial situation. If your income reduction is sufficient for you to qualify to file Chapter 7 bankruptcy, you may be able to convert your current Chapter 13 to a Chapter 7. Unlike a Chapter 13 bankruptcy, in which you make monthly payments to the court, which then distributes money to your creditors, a Chapter 7 allows debtors to completely discharge most unsecured debts, such as credit cards, personal loans, and automobile deficiency balances.

Which option is the best choice for you will greatly depend on the terms of your current bankruptcy case and your income and assets after your job loss. If you still have significant assets, such as a large amount of home equity, a Chapter 7 conversion may not be a viable option, as your assets may exceed your state bankruptcy property exemptions. Under a Chapter 7 plan, assets that exceed the value set by your state (or by federal law in some cases) would likely be sold by the court to repay your creditors. However, in a Chapter 13, most assets are protected from creditors.

As you can see from the information above, there are many factors that must be taken into consideration when deciding how to best address your reduction in income in relation to your bankruptcy case. You should consult with your bankruptcy attorney as soon as possible to discuss the change in your material circumstances and what options are available to you to resolve your financial difficulties. Only your attorney can tell you what action you should take in regard to your current bankruptcy case, so please consult with him or her at your earliest convenience.

To read more about bankruptcy, and the different types of bankruptcy available to consumers, I encourage you to visit the Bankruptcy Information page. I wish you the best of luck in resolving you financial difficulties, and hope that the information I have provided helps you Find. Learn. Save.



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Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 trillion.

According to data gathered by from a sample of credit reports, about 26% of people in the US have some kind of debt in collections. The median debt in collections is $1,739. Student loans and auto loans are common types of debt. Of people holding student debt, approximately 8% had student loans in collections. The national Auto/Retail debt delinquency rate was 4%.

The amount of debt and debt in collections vary by state. For example, in New York, 20% have any kind of debt in collections and the median debt in collections is $1755. Medical debt is common and 6% have that in collections. The median medical debt in collections is $456.

While many households can comfortably pay off their debt, it is clear that many people are struggling with debt. Make sure that you analyze your situation and find the best debt payoff solutions to match your situation.