What happens if the proposed cure is not feasible for the debtor?  In such a case, the judge would sustain the trustee's motion to dismiss or the debtor would not oppose the motion.  Either way, the debtor's Chapter 13 case will be dismissed.

When a Chapter 13 case is dismissed, creditors can immediately pursue all non-bankruptcy alternatives.  If there is a home and mortgage delinquency involved, the mortgage lender can start foreclosure proceedings.  If there is a car payment involved, the car lender can immediately start the repossession process.  Credit card lenders can restart collection efforts including calls and letters.

More importantly creditor claims go back to their pre-bankruptcy status.  If, for example your Chapter 13 plan called for a payment amounting to  5 cents on the dollar to unsecured creditors, a dismissal would give those unsecured creditors the right to pursue 100% of balances due + interest.

The law does allow a debtor to refile Chapter 13, but there are strings attached.  In a refiled case the automatic stay (the core protection of bankruptcy) would only last 30 days – your attorney would need to file a special motion asking the judge to keep the stay in effect beyond 30 days.

Generally, if case #1 was dismissed because of circumstances beyond the debtor's control – i.e. a job loss or illness – judges will be amenable to extending the stay and eventually approving a 2nd plan.   However, 2nd cases are inherently looked at with suspicion by Chapter 13 trustees.

A certain percentage of my Chapter 13 clients will fall behind because of illness, job loss, family emergencies, or an employer's failure to send in withheld funds.  Sometimes employers stop withholding funds for no particular reason.

Whatever the cause if you fall behind on your payment schedule to the Chapter 13 trustee, you will eventually face a trustee "Motion to Dismiss."   In the Northern District of Georgia, each of our three trustees use a computer system that periodically produces reports identifying cases that have gone delinquent and the system thereafter spits out a form motion to dismiss.

A motion to dismiss may also arise if claims (usually tax claims) come in higher than expected, thereby causing the plan to run more than 60 months.

What should you do if you receive a Motion to Dismiss in your case?

First, you should contact your lawyer's office to address the reason why the motion was filed and to discuss possible solutions.

From my side of the desk, I will discuss with you possible cures.  The good news here is that our Chapter 13 trustees are usually willing to work out a deal to save your case.  Typically the trustee will want 25% to 50% of the delinquent funds paid immediately and will accept the remaining balance of delinquent payments over time.

Here is an example:  Tom filed a Chapter 13 case in September, 2006.  It is now August, 2009.  The trustee motion to dismiss indicates that Tom is $3,500 behind on his payments to the trustee.  In this situation, I would look at the trustee's web site to see if there is a problem with the payroll deduction.  Perhaps Tom has changed jobs and I need to file a new payroll deduction.  Perhaps Tom's employer has been withholding and sending in the wrong amount.

I would also calculate how much longer Tom has in his plan.  Here the plan has been active for  almost 3 years (36 months).  This means that I have only 24 months left.

If Tom can come up with $1,000, I can propose a cure to the trustee: $1,000 payable now and $2,500 payable over the next 25 months at $105 per month.   Assuming the trustee accepts, I would modify the payroll deduction order to increase the monthly payment by $105.

The trustee will likely want "strict compliance" on such a cure – this means that if Tom should fall behind again, the trustee would not need to file a second motion to dismiss.  Instead the trustee would only need to send Tom and me a letter giving him 10 days to cure the delinquency, otherwise the case would be dismissed without further notice or hearing.

Now, let's consider another example:  Sally has been a debtor for 20 months.   Her monthly trustee payment is $1,300 per month.  Because of unexpected illnesses, Sally has fallen behind by $10,000.  She is currently out of work but will be back at her regular job in 6 weeks.  The hearing on the trustee's motion is scheduled for next week.

In this case, Sally would be able to come up with $2,000 within the next month.  Dividing the remaining $8,000 by 40 months = $200.   My proposal to the trustee would be $2,000 in 30 days + an additional $200 per month for the remainder of the plan and strict compliance on future payments.

If the trustee won't go for this type of deal, I would argue for it in a hearing before the judge.   The trustee might not accept it, and the judge might be concerned as well because Sally has no money up front.

What happens if Sally cannot afford this cure or if the judge would not accept our proposed cure?  I'll discuss that in another post.

Although I explain the implications this provision, many of my clients express shock and outrage when their expected refund of $3,000, $4,000 or more does not show up in their mailboxes, but instead ends up in the hands of the Chapter 13 trustee.  These clients, quite naturally, expect that the tax refund payment will reduce their Chapter 13 obligation and either reduce the term of their plans or possibly allow for a reduction in the regular monthly payment.

More recently one of my clients fell behind on his Chapter 13 plan and had to enter into a consent order with the Chapter 13 trustee to pay extra each month to cure the delinquency.   Shortly after the consent order was filed, this client saw a  $2,200 tax refund to to the trustee and he wanted to see that money applied to his delinquency and thus reduce the burden of his delinquency cure.

Unfortunately in both of these situations, my clients will not get the desired benefit from the "seizure" of their tax refunds.  The funds will go into the plan, but instead of reducing the balance or the term of the plan, they will increase the dividend payable to unsecured creditors

Why?  The trustee's position is that a debtor who is eligible for a tax refund has had too much withheld from his paycheck.  In other words, by having too much withheld, the debtor/taxpayer is essentially putting money into a savings account (a savings account that amounts to an interest free loan to the government, but that is another story).  Presumably, if the debtor had the correct amount withheld, there would be more disposable money available for the debtor's Chapter 13 plan.   Unsecured creditors should not bear the burden of a lower plan dividend so that the debtor can have a savings account.

Given that this is the trustee's position, I advise my clients to adjust their withholding numbers so that there will be little or no refund payable at the end of the tax year.   Assuming that there is some flexibility in the debtor's budget, the "extra" money can be allocated to approved expenses and what I call expected emergency categories, such as medical costs, transportation costs, even food.   If "extra" money is needed down the road, my client can tighten his belt some, but still have enough to survive.   This approach, in my view, clearly beats giving up one's expected emergency funds to the Chapter 13 trustee.

Not surprisingly payroll deduction cases work better – if the funds to pay your Chapter 13 come directly out of your paycheck, then there is one less variable to go wrong in your Chapter 13.

However….I have seen far too many cases in which a debtor got behind on his obligation to the trustee even when there was a payroll deduction.  Why?  Because the employer was withholding the wrong amount.

Payroll deduction orders are filed electronically.  When I file a case, there is a data entry screen for payroll deduction orders.  I fill in the appropriate data and the clerk of court sends out the deduction order.

In many Chapter 13 cases, however, the Chapter 13 plan I originally file on behalf of my client will need to be amended.  Many times, this amendment involves increasing the plan payment.  When that happens, I will file a second, or a third payroll deduction order through the electronic court filing system.  Each time the clerk of court mails out the new order.

Sometimes, the employer gets a second or third order from the clerk and does not recognize that the amount has changed.  Some employers ignore the second or third order altogether.  I have also seen situations in which an employer withholds money and sends it in for months at a time, then arbitrarily stops honoring the order, or arbitrarily starts withholding and sending in a random amount.

If you are a Chapter 13 debtor, you need to know exactly how much you are paying to the trustee as a plan payment and you need to know exactly how much should be coming out of your check.   Two years from now, you will have to cure the problem if your employer has been withholding $500 per month instead of $800 per month.  As far as the trustee is concerned, the payroll deduction exists as a convenience for you and for the Chapter 13 system.  At the end of the day, you bear the full responsibility for paying the correct amount to your Chapter 13 trustee.

If you believe that the wrong amount is being withheld, you need to call your lawyer.  If you change jobs or if the payroll deduction suddenly stops, you need to call your lawyer.

Just last week, one of my clients had his case dismissed after 4 1/2 years.  The case was fully funded for four years, and as of January 1 of this year the employer simply stopped the withholding.  In early May the trustee filed a motion to dismiss because of the funding problem.  Because there are only 6 months remaining, the cure for the arrearage would require my client to pay an extra $350 per month, which he does not have.  After all this time, this case was dismissed.  Had my client called me in mid-January, we probably could have solved his problem.  Clearly he knew that the payroll deduction had stopped but he did not take any action.

I urge all of my clients to be proactive when it comes to the funding of their Chapter 13 plans.   Chapter 13 is a long and intrusive process – don't lose your discharge because of an avoidable funding problem.

If you are a Chapter 13 debtor, you and you alone are responsible for making your trustee payments.

Pre-confirmation

In the Northern District of Georgia, all Chapter 13 cases must be funded by payroll deduction. An employer deduction order ("EDO") should be filed in your case at the time your case is filed. Until the money starts coming out of your check, however, do not assume that your employer knows what to do or knows how to do it right. Further, you should assume that your employer may need 1 to 3 payroll cycles to implement the payroll deduction. Until the money starts coming out, you have to make the payments directly.

I cannot tell you how many confirmation hearings have been held up because a Chapter 13 debtor was one or two bi-weekly payments behind. In fact, I advise my clients to send in the first one or two bi-weekly or semi-monthly payments under the assumption that the employer will not withhold accurately the first time.

The pre-confirmation period in a Chapter 13 functions as a kind of probation period for your Chapter 13. If we drafted an "aggressive" plan, there is a good chance that we may have to amend the plan and increase the payment to the trustee. If this happens, your attorney will file an amended EDO. But guess what. Some payroll office employees don't recognize that the amended EDO is different than what they received 4 weeks previously. When you plan is amended to increase the payment you need to verify that the correct amount is being withheld.

Post-confirmation

Five years is a long time. And during that five years you may experience an interruption in your employment causing an interruption in your pay and therefore an interruption in payment received by the trustee. Do not ignore this interruption and hope that no one will notice. The trustee uses a computer program to track payments. If you fall behind, the lapse will eventually trigger a trustee Motion to Dismiss. If that Motion to Dismiss occurs in year three, leaving you, for example 22 months left in your plan, any delinquency needs to be cured in that 22 months. This may require a substantial increase in your monthly payment or a large lump sum.