Debt Exception to the Rule

bankruptcy notice #8531

bankruptcy notice #8531 (Photo credit: Nemo's great uncle)

One debtor filing a Chapter 13 asked, “if you have unexpected expenses like a medical expense, can you add the new debt to your plan?” Theoretically, the answer is no, but there is a debt exception to every rule.

When you file a Chapter 13, a wage earner’s plan, you have to prepare a plan to pay back part or all of your unsecured debts over a 3 or 5 years. You must make this plan using any disposable monthly income you have left over after normal living expenses have been paid. Once confirmed, to legally change the plan is time consuming and costly.

One debt exception to the rule of not allowing new debt to be added to your Chapter 13 plan is when you have a baby during the plan process. Although bankruptcies have a place, time and documents provided where you can state there may be an anticipated change like a birth, the possibility exists of an unexpected birth during a 3 or 5 year plan. When it does happen, the good news is that there have already been case precedents set for bankruptcy courts allowing the additional debts and costs.

As an example, a debtor blogging on a bankruptcy forum website wrote, “Prior to birth of child in December 2011 we filed Chapter 13 in Early 2009. Our plan payment is at $300/month. Our income has remained the same since confirmation but with the new baby our total expenses have increased approximately $500/month due to childcare. I have contacted our attorney and she will be filing a motion to amend the plan payment. Any idea what to expect from the trustee?”

Most likely, the trustee will eventually accept the new debt as part of one of those exception to the rules. The question remaining is whether or not the money spent on the amendment will benefit the plan in payment changes.

Adding $500 per month to a plan over 60 months is a significant amount of disposable monthly income change, and if the debtor’s total income has not changed, the amount of the new expense may drive the debtor toward default on the bankruptcy plan. If default occurs over a period of time, and you are unable to catch up on payments, the bankruptcy trustee can dismiss the case.

There is another alternative for the debtor than amending the plan. She can possibly convert to a Chapter 7 bankruptcy if the new disposable monthly income falls below a certain area that makes a Chapter 13 plan impossible to complete. Converting to a Chapter 7 plan means the unsecured debts would be discharged at its conclusion. She can keep all her exempt assets, but she and her lawyer might want to evaluate how many assets she stands to lose in the conversion. The trustee will liquidate what non-exempt assets he can to pay off unsecured debt. By conversion, the debtor also runs the risk of losing some of her secured assets like a home or car to foreclosure or repossession.

In bankruptcy law, like any other law, there is always exceptions to the rules. That is why it is important to consult with a bankruptcy attorney before you consider filing. Experienced bankruptcy lawyers will know how bankruptcy trustees have responded to similar situations in times past.

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