4 Ways to Prevent Financial Problems
from Derailing Your Chapter 13 Plan

When your bankruptcy trustee finalizes your Chapter 13 payment, your attorney gives you specific instructions to make your payment by the specified due date every month. Missing payments puts your case in jeopardy; if you don't make your payments, your secured creditors may resume their collection activities to take back the collateral that secures your loan, like your home or car.

If you know that will not have enough money to make one of your payments, it is important to be proactive. Don't wait until you miss one or even several payments to call your attorney. Instead, take immediate action and contact your attorney to explore your options.

1. Request a Moratorium on Your Chapter 13 Payment

If you know that your financial difficulties are temporary, you can request a moratorium on your Chapter 13 payments. A moratorium permits you to legally stop making your Chapter 13 payments for a stated period. This period gives you a chance to recover from the situation that initially made it cumbersome for you to make your payments.

For example, if you have lost your job, a payment moratorium gives you time to look for a new job or file for unemployment. There is usually a waiting period before you get paid at a new job or receive unemployment benefits, and a moratorium helps to bridge this gap. Other situations where filing for a moratorium is a smart decision include losses due to a natural disaster or unexpected home or auto repairs.

2. Request Permission to Borrow From Your Retirement Savings

When you are in a Chapter 13 plan, you are not allowed to take on any new debt unless you get permission from the bankruptcy trustee. This includes taking a loan from your 401(k) plan. Even though the 401(k) is your money and you are technically repaying yourself, this reduces the amount of income that you have to repay your creditors. However, if you have unexpected expenses, such as medical bills or home repairs, a 401(k) loan can help you obtain the cash to cover these expenditures.

Before you take out a 401(k) loan, your attorney needs to file a motion to take on new debt on your behalf. Be prepared to explain what you need to use the money for and why you were not able to pay for the expense with the discretionary income in your budget.

3. Adjust Your Tax Withholding

If you typically get a large tax refund, it is time to change your tax withholding. For example, if you normally get a tax refund of $3,000, adjusting your withholding to get your refund as close to $0 as possible gives you an extra $250 each month. When your attorney proposed your Chapter 13 plan, the plan accounted for tax refunds. Changing your withholding just changes how and when you receive the refund.

To change your tax withholding, contact your HR department and request a new Form W-4. Follow the instructions to ensure that your new withholding amount is as accurate as possible.

4. Sell Some of Your Assets

Take a look around your home, and see if there are any possessions that you no longer use or just don't need. Old sports equipment, jewelry, furniture, clothing and appliances are items that you can sell to raise some cash. Before selling anything of notable value, such as a paid-off vehicle or expensive piece of jewelry, consult with your attorney.

When you sell your belongings, it is possible that your creditors may view this as a source of income and request that a portion of the proceeds goes toward debt repayment. Your attorney can help you determine if the sale will count as income, and if so, how much has to go to your creditors.

If you have questions concerning the sale of your belongings, contact Brace W. Luquire today for professional advice