Post-Confirmation Default: 6 Things That Happen When You Miss a Plan Payment

If you miss a payment in a Chapter 13 plan, you get late notices and a window to catch up. Act fast. The plan doesn’t stop when you miss a payment, but you’re on borrowed time, no pun intended. If you don’t catch up, you face mounting pressure to collect. If that’s not enough, the trustee or a creditor may ask the bankruptcy court to dismiss the case or convert it to a Chapter 7. If your case is dismissed, the whole bankruptcy stops. Yes, you’re back to where you started.

If your payment isn’t posted, your file shows as late, but it’s not a crisis yet. If you miss a plan payment, the Chapter 13 trustee sends you a letter and asks you to start making payments again. Falling behind on your Chapter 13 plan is bad, but not the end of the world. You still have options.

In Chapter 11, depending on the kind of plan you use, if it doesn’t have default terms of its own, then the IRS gives you five business days to make the payment before issuing a “pending default” notice. IRS notices regarding plan payments start with Letter 6566. The next notice is Letter 6567, the default letter.

After the default letter the IRS may begin using its own collection tools. Or it may ask the bankruptcy court to convert the case to Chapter 7 or dismiss the case. Or they may refer the whole mess to IRS Counsel. In Chapter 13, if you pay the trustee directly, and you miss two payments in a row, the judge may order your employer to take the plan payment out of your paycheck and pay it straight to the trustee. You’ll never see that money. Note that in payroll orders the law prohibits employers from honoring any garnishments, except ongoing child support. Keep copies of your paystubs as you’re going along.

The worst step is a motion to dismiss the case or convert it to a Ch. 7 liquidation. In Ch. 11, a material default on a confirmed plan is cause for a motion to dismiss or convert. The Bankruptcy Code mandates a hearing within 30 days from when the motion was filed, and a decision by the judge within 15 days after the hearing begins, absent consent or compelling circumstances.

Even when things look good, they can go off the rails. If you don’t carry out the subchapter V business plan, on a party’s request and on notice and a hearing, the court must remove the debtor in possession. Later, you can petition to be reinstated as debtor in possession. Nonconsensual repayment plans can give creditors a way to liquidate nonexempt assets.

Discharge is at risk if you don’t finish the plan. For nonconsensual subchapter V debtors, no discharge until all payments due in first 3 years of plan have been made. The court can order payments to go beyond three years, but not past five. In individual Chapter 11 cases, the discharge takes effect when the debtor completes all payments under the plan, absent a court order otherwise. But there is another, slimmer option: the ”hardship discharge.” Chapter 13 grants this kind of discharge only if the failure of the plan was due to things beyond your control, unsecured creditors already got at least what they would have gotten in Chapter 7, and modifying the plan is not a practicable option.

Dismissing the case undoes the bankruptcy. Unpaid debts, interest, and late charges usually come back. Any lien that was removed during the bankruptcy is generally reinstated. If your case is dismissed and you want to refile within a year, the automatic stay will only last for a month, unless you file to have the stay extended. If the repayment plan fails, that’s presumed bad faith filing. Lastly, there might be a 180-day filing ban.

Tell Your Attorney and the Trustee’s Office Right Away

Got problems? If you lose your job or get sick, tell your attorney and the trustee’s office right away. The trustee usually will not try to dismiss the bankruptcy unless you fail to respond to them, have not made any payments, or you have not filed a motion to modify your plan. If you are in danger of falling behind, you may be able to ask your attorney to file a motion to modify your plan. It’s important to move quickly. Within 3 years of plan confirmation (or max 5 years if the bankruptcy court previously extended it), if you’re in a nonconsensual Subchapter V case, you may petition to modify the plan. After that, the court will hold a hearing on the request, and before modifying the plan, the court will determine that doing so is warranted.

Your next task is to keep missing payments from piling up. One Chapter 13 office doesn’t even accept checks directly from debtors; bank checks and money orders are fine. If your plan calls for it, put your name and bankruptcy case number on all payments. Mail out your plan payments at least five days before due date.

If nothing works and you want to stop, the last resort is dismissal. You can ask to dismiss the Chapter 13 case any time, nobody can force you to stay in bankruptcy if you don’t want to. But in doing that, you are ending the bankruptcy. So, if you’re thinking about stopping, try to at least talk to your attorney before doing anything drastic.