Bankruptcy is a complicated and difficult decision to make. Once the decision to file for bankruptcy has been made there are a number of other choices that must also be made. What type of bankruptcy will you file for? Chapter 7 and Chapter 13 are the most popular. If Chapter 7, are you prepared to liquidate your assets? If Chapter 13, have you considered what type of repayment plan you are capable of maintaining and completing? Bankruptcy is a complex process filled with paperwork and many different options. Chapter 13 alone has a variety of avenues that can be taken before having the debt dismissed or discharged. To decide what type of bankruptcy is best for you and how best to proceed if considering bankruptcy, it is important to consult an experienced bankruptcy attorney to ensure the most beneficial outcome.
After making the decision to file for Chapter 13 bankruptcy, a debtor may be faced with unforeseen events that make it no longer possible for them to comply with their repayment plan. When this happens there are a number of options. When a debtor cannot fulfill their monthly payments they can have their repayment plan modified, request a hardship discharge, convert to a Chapter 7, or dismiss the current bankruptcy claim and refile. A plan modification may be best when a debtor is unable to keep up with payments but is still able to maintain monthly payments, just at a lower rate for a longer amount of time. So instead of paying $300 a month for 20 months, a debtor would be paying $200 for 30 months.
The next option is to request a hardship discharge. This is similar to the undue hardship request for discharge of student loan debt. To successfully claim a hardship discharge, a debtor must be able to prove by continuing to make payments in accordance with the Chapter 13 plan would create an extreme hardship for the debtor.
If a debtor is faced with the inability to make payments, converting their Chapter 13 to a Chapter 7 bankruptcy may be the best option. Conversion is also frequently used when a debtor wishes to surrender a property Chapter 13 would have saved. An example would be a single mother who filed for Chapter 13 bankruptcy to save her home, then after beginning the payment plan, the mother receives a job in another area where her mother resides. The debtor in this situation may choose to convert to a Chapter 7, surrender her home, and move to live with her mother debt free. Conversion is not possible in all situations, to determine if eligible it is important to speak with a bankruptcy expert and consult the Chapter 7 Means test for more insight.
The last option available for debtor’s unable to fulfill their Chapter 13 payments is dismissal. Dismissal may be the best case if a debtor is unable to modify a payment plan or convert. However, dismissal means the loss of immediate protection and long term benefits of Chapter 13 over Chapter 7 proceedings. Despite this, dismissal can be a useful tool when used wisely. If unable to make payments now, but believe will be able to in the future, dismissal protects income, tax, and other assets from the trustee and removes a case from the bankruptcy system all together. Before making this decision it is important to know how creditors will respond, some might not accept the dismissal as lightly as others.
The alternative to dismissal of a Chapter 13 case is discharge. Discharge means the plan was successfully completed and the debtor is relieved all debt included in the payment plan or protected under exemptions. 11 U.S.C. §1328 regulates discharges. Once a debtor is discharged, creditors are no longer able to collection or attempt to collection any additional debt. If discharge has been court approved and creditors continue to seek collection, the debtor should immediately speak with an attorney.
As always with the law, there are exceptions to every rule. It is important to keep this in mind when considering bankruptcy or working through a Chapter 13 payment plan. Additionally, it is essential to speak with an attorney at every step of the way to ensure the best outcome possible.