An advantage of filing a Chapter 13 case is that you can get out of it if your situation changes. But you must consider the consequences.
The Handy Right to Dismiss
A Chapter 13 case usually takes three to five years to complete. So it involves projecting your income and expenses that far out into the future. A lot can happen in that length of time to your income and expenses. So it’s sensible to ask what happens if your financial circumstances change during that period. It’s sensible to ask whether you can get out of the case altogether, and if so what are the consequences of doing so.
As discussed in my last blog post, the Chapter 13 “adjustment of debts” procedure comes with a virtual right to dismiss it, that is, to voluntarily get out of it. At any point in your case you can dismiss it and get out of the bankruptcy system altogether. This is different than Chapter 7 “straight bankruptcy” cases, which are harder to dismiss, as discussed in the blog post just before the last one.
Other Options Other than Dismissal
There are a number of other less extreme options under Chapter 13 for dealing with changes in your income and expenses during the case. You and your attorney can amend your income and expense schedules and file an amended Chapter 13 payment plan. Or you can usually convert your case into a Chapter 7 one. There’s even something called a “hardship discharge” which in limited circumstances allows you to complete your case early. We’ll look at these other options in future blog posts.
So dismissing your case is probably the most extreme of all the options. But it can be the best one in some situations. Knowing that you have this right to dismiss can make Chapter 13 a more attractive choice when you are trying to decide what type of bankruptcy to file.
The Practical Consequences
If you’re considering dismissing your case, here are some of the main consequences:
Once the bankruptcy judge signs the order dismissing and closing your case, you no longer need to make payments under the Chapter 13 plan. Also as of that point the court and the Chapter 13 trustee no longer have any further jurisdiction over your income, your tax refunds, or anything else addressed in your Chapter 13 plan.
At that point you lose one of the main benefits of being in a bankruptcy case—the “automatic stay” preventing your creditors from taking any action to collect on their debts, including repossessing a vehicle, foreclosing on a home, or similar action against any other collateral. So before dismissing your case, have a good understand how each of your creditors is likely to react to the dismissal and be prepared for it.
Under Chapter 13 you do not get a discharge of your debts until the successful completion of the case. So if you dismiss your case before that completion, your debts will not be discharged. You will owe all your creditors as before except to the extent that they received payments during the case. Most interest and penalties stopped during the Chapter 13 case will usually be able to be added onto your debts, including for the period of time that you were in the case.
When Dismissal is Nevertheless Appropriate
If the consequences of dismissal don’t sound so good, why would somebody ever want to dismiss their Chapter 13 case?
Simply because in some peoples’ situations the advantages of dismissal outweigh any disadvantages. People’s Chapter 13 cases can be very different and are filed for many, many different reasons. And circumstances change in countless way. So it’s not possible to give a neat and tidy answer to this.
Instead let me give you one scenario that illustrates when a dismissal can be the best choice.
Consider a debtor with the following main debts:
A vehicle loan that is current;
A home mortgage, 10 months behind on $1,500 payments, so $15,000 behind
Income taxes of $4,000 for last year’s taxes.
So she filed a Chapter 13 case a year ago in order to have three years both to catch up on that $15,000 mortgage arrearage and to pay off the income tax. She continued paying the vehicle loan directly so she’s still current on that.
But now a half-year into her case, she got a job offer requiring her to move to a neighboring state that she’d decided to accept. So she’s ready to surrender the home to the mortgage company, because under the terms of her mortgage she would owe them nothing if she did so. The income from her new job would be enough to allow her to continue making her vehicle payments, and to set up an installment payment plan with the IRS to pay off the tax debt outside of bankruptcy. She does not owe much to the rest of her creditors and is confident that she can make payment arrangements with them.
Given this person’s changed circumstances, dismissing her Chapter 13 case could well be her best option.
Dismissing a Chapter 13 case has big consequences, some of which are immediate, and some potentially dangerous to you. Although you get the benefits of no longer being under the jurisdiction of the bankruptcy court and trustee, you also lose the immediate protection and long-term opportunities of Chapter 13. Dismissal is a relatively drastic step among a number possible ones to consider if your circumstances change. But it can be useful tool when used in the right situation, if you have a good understanding of how it works.