New Modified 7-Year Chapter 13 Plans

The coronavirus CARES Act temporarily allows ongoing Chapter 13 plans to be amended or “modified” to last a total of 7 years (instead of 5).

Last month we described the changes to bankruptcy law made by the coronavirus CARES Act enacted on March 27, 2020. One of those changes is the ability to extend the length of ongoing Chapter 13 payment plans. Until now these previously-approved plans could last from a usual minimum of 3 years to a maximum of 5 years. That maximum has now been extended to 7 years.

Longer Plans Can Be Very Helpful

Overall, longer Chapter 13 payment plans give you more flexibility. And greater flexibility is one of the main advantages of the Chapter 13 bankruptcy option.

Usually you want to finish your bankruptcy case as soon as possible to get on with life. But often having more time within Chapter 13 can be a huge benefit.

You choose Chapter 13 over Chapter 7 “straight bankruptcy” to meet a specific goal (or two). You’re saving your home from foreclosure, or cramming down a vehicle loan, or paying nondischargeable income taxes. You’re keeping an asset you’d otherwise lose, catching up on child or spousal support, or saving a sole proprietorship business.

To accomplish these goals you have to pay a certain amount into your Chapter 13 plan over time. Having more time to do so means being able to pay less per month during the plan. This can make the difference between a plan payment that you can’t afford and one that you can. So, having the option of two more years to finish off a payment plan can make the difference between an impossible plan and a feasible one. It’s the difference between an unsuccessful Chapter 13 case and a successful one.

Longer Plans during the Pandemic

This is especially true during this time of the COVID-19 pandemic. If you lost your job or have taken a pay cut while you’re in a Chapter 13 case, you may not be able to make your plan payment at all. Or you may only be able to pay a lower amount.

More time to pay means that you would likely be able to skip some payments if your unemployment is temporary. You would likely be able to reduce the plan payments—either temporarily or from now on—and still finish successfully.

This greater flexibility could well become especially important going forward. That’s because for most of us the pandemic’s financial consequences will likely be playing out for many months. So having this extra two-year cushion to finish your case successfully may become invaluable.

Only Court-Approved Plans Included

However, these new 7-year Chapter 13 payment plans have two strict timing considerations.

First, this 7-year change applies “to any case for which a plan has been confirmed… before the date of enactment of this Act.” Coronavirus Aid, Relief, and Economic Security Act (“CARES”), Section 1113(b)(1)(D(ii). CARES was enacted on March 27, 2020. The “confirming” of a plan is the bankruptcy judge’s formal approval of a plan that you and your bankruptcy lawyer proposed. Confirmation usually occurs at or around the time of your “confirmation hearing.” That’s usually happens about two months after you file your Chapter 13 case.

So to be able to extend your plan up to 7 years you must have had a court-confirmed plan by March 27. Even if you’d filed your case but your plan wasn’t confirmed by that date, you’re limited to the 5-year maximum.

Second, this 7-year provision has a “sunset” clause. It’s deleted from the Bankruptcy Code effective “on the date that is 1 year after the date of enactment.” CARES, Section 1113(b)(2). So assuming you had a confirmed plan before March 27, 2020, you must successfully modify your payment plan by March 26, 2021. Otherwise you’d lose out on this temporary 7-year plan modification option.

The Primary Condition to Meet

The new law says that you can modify a plan if you are “experiencing or [have] experienced a material financial hardship due, directly or indirectly, to the coronavirus disease 2019 (COVID–19) pandemic.” CARES, Section 1113(b)(1)(C). What a “material financial hardship” is, especially one “due… indirectly… to the… pandemic,” isn’t clear. Presumably a job or income loss related in any way to the pandemic should count. Beyond that bankruptcy judges will be making case by case decisions about what circumstances qualify.

The Usual Other Conditions for Modification Still Apply

The modified plan also must meet the normal set of conditions laid out in Chapter 13 of the Bankruptcy Code. (“Sections 1322(a), 1322(b), 1323(c), and the requirements of section 1325(a) [of the Bankruptcy Code] shall apply to any [such plan] modification… .” CARES, Section 1113(b)(1)(C).) Generally these are the same conditions that you had to meet to get your original plan—or a previous modified plan—approved. Contact with your bankruptcy lawyer about qualifying.

Other Changes May Be Coming

There will very likely be more legislation coming from Congress regarding the pandemic. Some may tweak the Bankruptcy Code further. The 7-year provision may be extended more, such as to new Chapter 13 cases. We will report on any such future changes affecting bankruptcy.