Chapter 13 and Change of Circumstances
I received an email from a person asking me some very good questions about what would happen in a Chapter 13 bankruptcy if the person moved during the Chapter 13, whether the payments in the Chapter 13 would have to change if income changed, etc…
All of these concerns would require a detailed analysis of the particular facts of the case to answer properly, but I can provide some general rules about this. It is not necessary to obtain court permission if you decide to move to a different state during your Chapter 13. Chapter 13 does not put you in prison or on probation. You are free to seek economic opportunity in another state or move with your family, etc… You should, of course, continue to make your Chapter 13 payments and provide your attorney with your new address. The attorney should file a change of address with the court. This insures that you continue to get notice of anything that happens in your case.
The issue of an income change is more complicated. Basically, you have to show proof of income to the trustee at the meeting of creditors and at that time the trustee verifies your income and makes a determination as to whether the trustee can recommend to the judge that your case meets all the requirements for confirmation. Most income and expense issues are ironed out by your attorney, your creditors and the trustee before the confirmation hearing and after the meeting of creditors.
Once the plan is confirmed by the judge, it runs on auto pilot. Something has to happen before someone begins to look at the case again. Either a creditor could claim you haven’t kept up with your payments outside of the bankruptcy, assuming there are any, or the trustee will notice that you aren’t making your payments on time or something like that to call attention to your case. Technically, when your income changes, your plan should change. The bankruptcy law says that debtors must provide all “disposable” income over the life of the plan to repay creditors. This is known as the “best efforts test.” A debtor must use his or her best efforts to repay as much debt as he or she can afford over the plan term.
When your income changes, then technically the plan is supposed to change too. However, the change does not happen automatically. If your income goes down, your attorney must file a motion with the court to “modify” the plan. You will have to provide a new budget and defend the new budget. Of course, there are limits to how low a plan payment can be reduced based on the amount of debt covered in the plan and what your original plan term was (36 months or 60 months). If it is possible to reduce the payments and your circumstances have changed for the worse and you can prove that to the judge, than it is likely the judge would approve the reduction in the plan payments.
If your income has increased and a creditor, the court or the trustee finds out that your income has increased, they could file a motion to dismiss your case claiming that you are no longer doing your “best efforts.” At that point, you’d likely have to file a motion with the court to increase your plan payments to comply with this bankruptcy requirement. As a practical matter, it may not be easy for the trustee, a creditor or the judge to find out your income has increased, so rarely does a debtor face this problem.
Interestingly, the new bankruptcy reform legislation that will go into effect on October 17, 2005 will require debtors to file “annual financial statements” upon request (I guarantee you trustees will request) of a party in interest. Basically this will mean that every year debtors in Chapter 13 will have to provide new budget information. Unless the debtor can show that his/her budget shows the exact same amount of disposable income to demonstrate the debtor’s “best efforts” this could require the debtor to adjust his/her plan payment each year to fit within his/her new budget. This is a new requirement and one that I think was part of the new legislation to try to force debtors to cough up more money in Chapter 13 plans if their financial situation improves during the plan. Again, nothing happens automatically, there would have to be some sort of motion to increase the payments or to decrease the payments.
July 22nd, 2008 at 9:55 pm
I would like to know the sucess rate of 2nd mortg lien strips here in Los Angeles, CA. My house is currently valued at 440,000. My 1st is at 518,000 and 2nd is at 130,000. What is the probability of the 2nd b eing stripped?