3 approaches to bankruptcy after job loss

Dear Bankruptcy Adviser,
We have been in Chapter 13 bankruptcy for almost two years. My husband lost his job in May of this year. We cannot afford the $1,800-per-month (bankruptcy plan) payment without my husband’s income. We did get one three-month deferment of the Chapter 13 plan payment, but we’ve been told by our lawyer that we may lose our home and cars. We’re going to sell our home. But if we lose our cars, I cannot work. Are there any options for us?
— Kim

Dear Kim,
I am sorry to hear about your continuous string of unfortunate events. First, you were in a position that required you to file for bankruptcy and now your husband loses his job. That truly is a harsh reality you are facing.

Yes, your attorney is right. Your options are limited. However, lenders are acting very oddly, and you might be able to work out a modification. Here are three possible actions you might take.

1. Dismiss the Chapter 13

In general, barring any significant exception in your case, you can voluntarily drop the Chapter 13 filing. This means that you file a motion with the court to dismiss your case and deal with the home mortgage company, car lender and credit card companies on your own. This could be a daunting burden on you, but that is an available option.

The car lender will be your first phone call because you must keep the vehicle. It is likely that you are behind on the car if you’re making the payments through the bankruptcy plan, meaning you’re sending your payment to the court and the trustee assigned to your case is sending payments to the lender. Call the lender’s bankruptcy department and see whether you can set up a postdismissal payment plan.

2. Convert to a Chapter 7

It would appear that with the loss of your husband’s income, you would qualify for a Chapter 7 bankruptcy. That means the loss of his income likely would allow you to make essential monthly payments and pay nothing to your other creditors.

However, you need to find out whether you have assets that would not be protected in a Chapter 7 bankruptcy. Converting to a Chapter 7 case could be a complete disaster if, for example, you actually have equity in your home or in an unprotected vehicle. You lose those assets because the trustee sells them to pay creditors. Even so, you could use this option to buy yourself some time to work out a postbankruptcy-filing modification with the lender. But if it’s not handled properly, it could make your financial situation even worse.

3. Modify your loan while inside the Chapter 13 bankruptcy

This is an option that must be explored immediately. If your attorney already got you three months of deferred Chapter 13 payments, then you must contact the lender and see whether you can modify the terms of your mortgage loan. Many clients are having success with this option while inside the Chapter 13 bankruptcy. You might need your attorney to authorize the lender to talk to you, but explore this option before you get behind on your mortgage payments.

Chapter 13 bankruptcy is very difficult and doesn’t give you much room for error. It is hoped you sought out information immediately and did not wait too long to find solutions to your problem. You did a great job so far, since you stayed in the Chapter 13 bankruptcy for two years. I truly hope you can still save your home.

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