Many people in an existing, confirmed chapter 13 plan have suffered a change of income, and have inquired about their options. Even debtors whose income has not been impacted have a few new options to consider.
When a chapter 13 debtor’s income decreases, we take a whole new look at their budget, and go through their options, which would typically include converting to chapter 7, modifying the plan to reduce payments, or just picking themselves up by their bootstraps and remaining current. It’s best to be proactive and discuss these options with your attorney, before you are under the gun of a pending motion to dismiss your case. While the Minnesota Chapter 13 trustees have not made any formal announcements that they won’t dismiss cases, they have informally indicated that unless a debtor wants their case dismissed, they will work with anybody who has COVID-related issues and wants to stay in chapter 13.
When going through these options, before I even look at the new budget, we look at the underlying reasons why the person filed chapter 13, and what they are paying in their plan as of right now. If the debtor is just paying general unsecured creditors, we definitely want to look at chapter 7, (unless the reason they were in a chapter 7 is because of a prior case within the prior eight years, would sometimes mean it might be time to dismiss the 13 and file a new chapter 7). If the person is in chapter 13 for instance to stop a foreclosure and paying back mortgage arrears, conversion to chapter 7 doesn’t accomplish much unless the mortgage arrears have been cured. Mortgage arrears and car loans and taxes (the “base payments”) always need to be paid before the end of the plan. If the case is converted to 7 before they are paid, the house goes back into foreclosure, the car will be contractually behind and probably repossessed, and remaining taxes still need to be paid.
One option we can consider, particularly for people who are having a tough time making their payments regardless of any change in income the CARES act grants one really cool option, which is to extend the plan out 84 months from when it was filed, i.e. seven years. This also can make sense for debtors who have graduated payments that increase in later years.) This provision only applies to cases which were confirmed before March 27, 2020, and it will require a plan modification which needs to be done by early next year, then we are back to five year maximum options only.
If your plan requires you to make additional lump sums, e.g. from a large tax refund or bonus, and you need that money now to make ends meet, the trustees are particularly lenient in permitting you to do so (i.e. we would need to modify the plan accordingly, and they are not likely to give you a hard time about your budget or needs).
Another cool option of the CARES act is that federal student loans are not accruing interest until September. We can put in a provision in chapter 13 plans to permit you to talk to your student loan providers, so that rather being in a forbearance status, you can be in a current/active status, with $0 payments, and get credit for the timelines that you need for forgiveness pursuant to an income contingent plan and/or public service forgiveness.
It’s also worth noting that any federally backed mortgage is currently subject to a moratorium on foreclosure, although I have not heard that they have stopped bringing motions for relief from stay for chapter 13 debtors who are not making their payments. So if things are tight, your best bet is probably to continue making your mortgage payments, and we can try to structure plan out over 84 months to give you a more affordable means of staying in your house.