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Done paying off your Chapter 13 bankruptcy? Court says maybe not.

Bankruptcy is a process designed to offer those who qualify a fresh financial start. Different types are available, but one of the more common is a chapter 13 bankruptcy petition.

A petition for relief through a Chapter 13 bankruptcy generally allows the petitioner to keep his or her possessions. Instead of the possessions being sold off by a trustee and the funds going towards payment to creditors, the petitioner agrees to a payment plan. This plan is designed to be more manageable than the payments that were required before bankruptcy and generally spans for three to five years.

Bankruptcy law provides that these payments end after the plan is complete.

Court questions the end date of Chapter 13 plan: When is payment truly done?

Like all things in the legal world, Bankruptcy law can have some grey areas. In this instance, the grey area involves the exact end date of a Chapter 13 repayment plan.

The question was raised in a case involving a woman that had finished her repayment plan. The trustee, upon reviewing tax returns for the final year of the payment plan, noticed that there was a change in income. The reported income had increased by $50,000.

Based on this increase, the trustee requested a modification to the payments. The issue: even though the modification involves the final year of the repayment period, the request was technically made after the payments were complete.

Digging into the law: Is there a loophole?

The case involves an analysis of Bankruptcy Code Section 1329(e). This essentially states that the plan can be modified. Such modification can be requested by the filer, creditor or trustee.

In this case, the trustee made the request. The filer had two counter arguments to the request:

  • The payment plan is complete, so modifications are no longer allowed under bankruptcy law.
  • Divorce led to different financial circumstances. As a result, the increase in income was countered by an increase in expenses since the petitioner moved from a two income household to a one income household.

The courts initially ruled the first argument in the filer's favor. However, on appeal, the court found that the Bankruptcy Code would support a modification in this case.

The case was sent back to lower courts to rule on whether or not the facts supported a modification.

What does this mean for other bankruptcy petitioners?

Those who are currently making payments on a Chapter 13 bankruptcy plan can learn a number of things from this case. First off, the case highlights the importance of legal counsel. Having experienced counsel can help to better ensure that your rights are protected. In this case, that could mean building a strong case that the facts of this woman's circumstance do not support a modification.

Second, it shows the complexity of bankruptcy law. A single question led to courtroom battles and appeals and could lead to additional payments even after the filer believes she is done with her plan. This again highlights the importance of legal counsel in these matters.

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