Can You Modify a Chapter 13 Bankruptcy Plan to Treat a Claim Initially Handled Outside the Bankruptcy?

At Kelley Kaplan & Eller, we have guided countless clients through the Chapter 13 bankruptcy process and the details of your plan matter. A recent ruling from the United States Bankruptcy Court for the Middle District of Florida underscores just how critical it is to get your Chapter 13 plan right the first time and why experienced legal counsel is essential.

The Chapter 13 Plan

In a Chapter 13 bankruptcy, a debtor proposes a repayment plan to restructure his/her debts over a period of three to five years. One of the central features of this type of bankruptcy is the flexibility it offers, including the ability to modify the plan under certain circumstances. But what happens when a debtor initially elects to handle a specific debt outside the bankruptcy plan—can that choice be reversed later?

Treating a claim outside a plan typically means the debtor intends to make payments directly to a creditor rather than through the Chapter 13 trustee. Common examples include mortgage payments on a primary residence or car loans the debtor wants to remain current on.

Suppose a debtor initially proposes to pay a mortgage outside the plan and maintain regular payments directly to the lender. Midway through the plan, the debtor falls behind on payments and seeks to modify the plan to cure the default through the Chapter 13 trustee.  Is this permissible?  The Bankruptcy Court for the Middle District of Florida recently held that this type of modification is not permissible.  Here’s why.

The Basic Legal Framework

Modifications are permitted in response to changes in circumstances, such as a job loss, medical expenses, or other financial hardships. But modifications are not automatic, and they must be approved by the bankruptcy court and meet certain basic statutory requirements.

In In re Johnny G. Viloria-Martinez and Luismira Diaz Rodriguez, the debtors had a confirmed Chapter 13 plan that specified that they would pay certain debts, including a car loan with OneMain Financial, outside of the bankruptcy plan. This means the bankruptcy court did not formally “provide for” that debt within the payment structure of the plan.

Six months later, the debtors attempted to modify their plan to surrender the vehicle and discharge any remaining debt on it. But the court said no.

The Court’s Reasoning

The court ruled that since the car loan was not included in the plan in the first place, it could not be modified later under the Bankruptcy Code. This is because the debt wasn’t “provided for” in the plan so the debtors cannot treat the claim in the bankruptcy since they originally wanted to treat the claim outside of bankruptcy.

The takeaway? Once you choose to handle a debt outside your Chapter 13 plan, you can’t go back and change your mind halfway through.

Why This Matters to You

If you are considering Chapter 13 bankruptcy, it is critical to understand how your plan is structured. You may think paying a creditor directly is simpler, but that decision can come back to haunt you if your financial situation changes.

Here are a few key lessons:

• All debts should be carefully considered when drafting your plan.
• Modifications are only allowed for debts included in the plan.
• Failing to include a secured debt may mean you won’t be able to discharge it—even after years of payments.

How Kelley Kaplan & Eller Can Help

As West Palm Beach’s trusted bankruptcy and litigation firm, we don’t just file your paperwork we help you strategize. Our experienced team will ensure your Chapter 13 plan puts you in the best possible position for success. We care, we get results, and we’ll guide you toward a fresh financial start.

Ready for a Fresh Start?

If you are facing foreclosure, struggling with debt, or navigating bankruptcy, don’t go it alone. Contact Kelley Kaplan & Eller today to schedule a consultation. Let’s get your financial future back on track together.