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How have bankruptcy laws changed due to COVID-19?

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) changed or amended several laws regarding both business and personal bankruptcy. Some individuals may qualify for an extension on their bankruptcy repayment plan claiming "material financial hardship" due to COVID-19 while others may not have to file for bankruptcy at all.

Under the CARES Act, individuals who have already filed Chapter 13 and have established payment plans can request certain changes if they are found to have suffered "material financial hardship" due to COVID-19.

What does "material financial hardship" from COVID-19 mean under revised bankruptcy laws?

Section 1329 of the Bankruptcy Code was amended to include a section (d). This section details this significant change in the Code. It allows for the debtor to request changes to their Chapter 13 plan, such as lowered payments and a longer time to pay. The primary factor that they must meet is that they have experienced or are experiencing material financial hardship, either directly or indirectly, because of COVID-19.

This means that any plan that is changed because of this provision can be extended, up to a limit of seven years from the initial payment date of the original approved plan. It essentially extends Chapter 13, adding as many as two years onto the established five year limit as allowed by law.

The CARES Act does not specifically define "material financial hardship," leaving that to the courts. Generally speaking, the term refers to economic hardship that poses a threat to health and wellbeing because it limits or restricts access to food, shelter, and other vital needs for survival. Job loss and loss of income are typically used, but there are others as well. Based on recent case law, the definition of the term as it relates to bankruptcy laws can be rather broad, as seen in the following cases:

  • In re Fowler, No. 16-31791 — Fowler was on a fixed income and argued that after the pandemic her expenses increased because she had to care for several family members who were sick.
  • In re Lewis, No. 19-32243 — Lewis argued that as a result of the pandemic, her hours at work were reduced which reduced her income.

In both of these cases, changes to the bankruptcy plans included lowering the payment amount and extending the length of the plans.

How do I seek modifications to my Chapter 13 repayment plan?

If you already have a Chapter 13 bankruptcy and are having trouble making the payments on your plan, you may be able to request changes to your plan, such as lowering your payments.

When your original payment plan was put together, there were a number of factors that were taken into account:

  • Income
  • Types of debts
  • Expenses
  • Any nonexempt property owned

When determining if your payments can be reduced, the types of debts you have and the nonexempt property that you own are used to make that decision.

  • Types of debts — Debts like child support, alimony, and certain tax obligations are required to be paid in full. Medical debt, credit card debt, and personal loans are not required to be paid off in full. This means that if the bulk of your debt is the type that must be paid in full, it could impact your ability to lower your payment.
  • Nonexempt property owned — A Chapter 13 bankruptcy required that your unsecured creditors are paid at least as much as they would have been paid if you had filed Chapter 7. Unsecured creditors would have, under Chapter 7, been entitled to your nonexempt property value. The plan is required to pay the amount they would have received. If you have to pay a specific amount to your unsecured creditors, it could prevent you from reducing your payment.

To modify your plan, you must file a motion to modify with the court. You must then serve it to the bankruptcy trustee as well as all of your creditors. Typically, a motion to modify must be accompanied by:

  • Written declaration detailing why your payment on your Chapter 13 plan should be reduced.
  • A hearing date.
  • A proposal for a new Chapter 13 payment plan.

Your trustee and creditors will have the opportunity to review the new plan you are proposing. They can then object to the plan. If the creditor or trustee objects to the amended plan, they will have a chance to explain their position to the judge, then the judge will rule.

Get help managing your debt, credit, and personal finances

Staying on top of your finances can be challenging. Use these essential Rocket Lawyer Debt and Bankruptcy documents to help you manage your finances and seek assistance or forbearance when needed. Fill out the Bankruptcy Worksheet to determine if bankruptcy might be the right choice for you. If you have questions about your specific situation, talk to a Rocket Lawyer network attorney for fast and affordable advice.

This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.

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