Chapter 13 bankruptcy involves crafting a repayment plan to your creditors over a 3-5 year period. If like many chapter 13 debtors, your income is too high to qualify for chapter 7 bankruptcy, your repayment plan will take place over a 5 year period. At the end of the repayment plan, the debtor’s remaining debts are discharged or forgiven. However, according to bankruptcy expert Steve H. Nickles, most chapter 13 bankruptcies don’t end with a discharge of debts. Instead, most chapter 13 cases are either dismissed or converted to chapter 7 bankruptcy.
Reasons for Dismissal of a Chapter 13 Bankruptcy
Chapter 13 bankruptcy is also often referred to as a “wage earner’s plan.” This is obviously because it takes regular income in order to fund a chapter 13 plan. Perhaps the number one reason chapter 13 cases are dismissed is change of circumstances that doesn’t allow for monthly payments to be made on time. If you’re in chapter 13 bankruptcy and don’t make payments, the trustee will motion to dismiss your case. Unless you can then cure your past due chapter 13 payments, the court will grant the motion. Chapter 13 dismissed. Once a chapter 13 case has been dismissed, creditors can once again proceed with collection activity. As Georgia bankruptcy attorney, Jonathan Ginsberg explains:
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.
It should also be noted that some chapter 13 dismissals occur at the request of the debtor. Chapter 13 bankruptcies are more easily dismissed than chapter 7 cases and sometimes debtors just simply change their minds.
Converting Chapter 13 to Chapter 7
The tragedy of chapter 13 dismissal for non-payment is that, in many cases, a change in circumstances has unwittingly allowed the debtor to qualify for chapter 7 bankruptcy. Reduced income can change a failing means test grade to a passing one and open wide the doors to the quick debt relief of straight bankruptcy. Section 1307(a) of the bankruptcy code gives a debtor the absolute right to convert a case from chapter 13 to chapter 7, assuming they otherwise qualify for chapter 7.
Why Would a Debtor Choose to Convert to Chapter 7?
The most common reason for conversion is the inability to make plan payments due to a change in financial circumstances. Another related catalyst for moving to chapter 7 is problems with mortgage and car payments. Many debtors enter into chapter 13 bankruptcy because of the opportunity it affords to catch up on past due home and car payments. While this is a wonderful option that allows many to keep their homes and cars, the bankruptcy rules still require that normal monthly payments be maintained. If a chapter 13 debtor realizes that, despite their best efforts, maintaining a car or mortgage has become too expensive, chapter 7 allows for relief in the form of surrender.