How the 2026 Tariffs Affect Chapter 13 Bankruptcy Plans

In a Chapter 13 case, the “Feasibility” test is what determines if a debtor can afford to fund the plan. Under §1325(a)(6), a bankruptcy judge must find that the debtor will actually be able to make all payments under the plan. This happens at the Confirmation Hearing.

However, because of the economic impact of the tariffs, there is a disconnect between the 2026 tariff-driven price spikes and the funding of bankruptcy plans.

By Alexander Hernandez, J.D., Professor, and Author of Consumer Bankruptcy Law (Routledge).

Key Takeaways for Chapter 13 Bankruptcy Plans and Tariff Inflation

• Delays with the IRS National Standards: With the IRS National Standards delayed until June 2026, existing bankruptcy plans are stuck with “ghost budgets” that don’t reflect current grocery or utility costs.
• Affording the Chapter 13 Bankruptcy Plan: A bankruptcy plan may not be feasible if not impossible due to the rise in costs because of the tariff impact.
• Is a Modification Possible: While Plan Modifications are possible, that has to be weighed against the Chapter 7 Liquidation Test.

How the 2026 Tariff Inflation Affects Chapter 13 Bankruptcy Plans

In a Chapter 13 case, the “Feasibility” test is what determines if a debtor can afford to fund the plan. Under §1325(a)(6), a bankruptcy judge must find that the debtor will actually be able to make all payments under the plan. This happens at the Confirmation Hearing.

However, because of the economic impact of the tariffs, there is a disconnect between the 2026 tariff-driven price spikes and the funding of bankruptcy plans.

The “Disposable Income” Disconnect

The Bankruptcy Code assumes your “disposable income” is a static number. If the court decides you have $400 left over each month, that $400 is pledged to your creditors for the next three to five years.

However, as I noted in a previous article regarding Chapter 7 bankruptcy and tariff-driven inflation, a family’s “reasonable and necessary” expenses have increased by approximately $1,000 because of the tariffs, which were determined unconstitutional by the Supreme Court.

Why This Could Lead to Dismissal of Your Bankruptcy Case

Because Chapter 13 plans are “tight” by design, there is no margin for error. When a tariff-driven price hike adds $100 to a family’s monthly cost of living, that money has to come from somewhere. Usually, it comes from the Chapter 13 plan payment.

What is the likely result? A wave of “defaults.” Debtors aren’t failing because they are irresponsible; they are failing because the “Feasibility” math from 2025 didn’t account for the impact of the 2026 trade war.

The “Liquidation Test” Collides with the Reality of Chapter 13 Bankruptcy

Here is where strategy is necessary to be able to remain in your Chapter 13 bankruptcy. To make a plan “feasible,” it might require filing a motion and arguing that higher expenses result in less disposable income. However, every dollar we “save” for the debtor’s grocery budget is a dollar taken away from the Unsecured Creditor Pool.

This triggers a conflict with the Liquidation Test (The Best Interests of Creditors Test). Under §1325(a)(4), a Chapter 13 plan must pay unsecured creditors at least as much as they would receive in a Chapter 7 liquidation.

For example, suppose that because of non-exempt equity, such as in a car, a debtor has $6,000 that belongs to the bankruptcy estate. In a Chapter 7 case, that is the amount required to be paid back to the trustee if a debtor wishes to keep the car. With Chapter 13, that is the minimum amount unsecured creditors would receive, regardless of the amount owed.

The Conflict: If tariff-driven inflation forces us to increase the debtor’s “reasonable and necessary” expenses, the monthly payment drops.

The Failure: If that lower payment no longer covers the required liquidation value over 60 months, the plan is unconfirmable.

The Professor’s Conclusion: The 2026 Bankruptcy Dilemma

If debtors fail to meet the requirements of the “Liquidation Test,” their Chapter 13 bankruptcy could be dismissed. This creates a “No-Man’s Land” in bankruptcy where the debtor is too “poor” to succeed in Chapter 13, but the non-existent surplus pushes them into Chapter 7, potentially losing their non-exempt assets.

If facing this situation, discuss your options with your bankruptcy attorney, including converting your case to Chapter 7 or potentially dismissing it on purpose to negotiate directly with creditors.

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