Filing a Chapter 13 payment plan can be riskier than a straight Chapter 7 case, but those risks can be worth it. To make a better informed choice about this it helps to know what your options are if things change while you’re in the middle of your Chapter 13 case.
A Chapter 13 costs much more, takes about 10 times as long, and the odds of finishing it successfully is much lower than under Chapter 7. So why would a person even consider it?
Because under certain circumstances Chapter 13 can be much more powerful, enabling you to solve your financial problems when Chapter 7 can’t. Sometimes the higher cost is far outweighed by how much more debt you can discharge (legally write off)—possibly even tens of thousands of dollars more. And the length of a Chapter 13 case can actually be its advantage, buying you more time or stretching out payments longer to reduce the monthly amount.
Going through all the possible advantages of Chapter 13 would take many blogs (some of which you can find in our blog archive). But a good starting point is to get a feel of the options that you have if you do file a Chapter 13 case and then a year or two later your circumstances change.
Modifying Your Plan
A Chapter 13 plan lays out in detail how much you pay to the trustee and how he distributes that money to your creditors. You and your attorney prepare and propose the plan to the court and your creditors, and the court usually either approves what you’ve proposed or does so after some agreed adjustments to the plan. Then if months later, or a year or two later, your income and/or expenses change, or if you change your mind about keeping a vehicle or some other collateral, these shifts in your circumstances can often be resolved by filing a “modified” plan—one with new payment and distribution terms. If so, then your case can continue on, with your initial goals either completely or mostly intact.
Dismissing Your Case
Unlike a Chapter 7 case, in which you’re pretty much stuck in it once you start, you can pretty much get out of your Chapter 13 case whenever you want, by voluntarily dismissing it. This is not as simple as it may sound—filing a Chapter 13 case, getting the plan approved, and making payments on it all take a fair amount of time, money, and effort, so you don’t want to start a Chapter 13 without a firm intention of finishing it. But there are situations in which, knowing that you usually have the option of dumping your case later, will make the decision to file it more sensible.
But dismissing your case means that you will still owe your creditors. So Chapter 13s are usually dismissed in unusual circumstances, and often as a temporary tactic before filing a new Chapter 13 case (because of new unexpected creditors, for example), or when adding or excluding a spouse from the case. But again, it can be good to know that there is usually a way out of a Chapter 13 case if necessary.
Converting to Chapter 7
Sometimes the change in your financial circumstances is so significant that you are no longer able to make any plan payments whatsoever, no matter how small. Or the reason you filed a Chapter 13 case (instead of Chapter 7) becomes no longer valid, for example if the house you were trying to save is no longer important to you because you got a job in another state. Since dismissing a Chapter 13 case stops it in its tracks, leaving you owing all your debts, converting to a Chapter 7 usually solves this problem by discharging all or most of your debts. As a result, this option is often used when there is a major financial or other change during a Chapter 13 case.
This last procedure is not often used but needs to be mentioned as one of your possible options. If 1) you are not able to finish your Chapter 13 plan because of circumstances outside your control, 2) your plan cannot be modified In a way that your case could continue, and 3) your creditors have received as much as they would have received, if any, had you originally filed a Chapter 7 case, THEN even though you have not finished your plan payments you can get a “hardship discharge” of your debts. That discharge may not include as many of your debts as it would if you would have successfully finished the Chapter 13 case. This might be your best option if none of the other ones are possible.