One of the drawbacks of a Chapter 13 bankruptcy proceeding is that it takes a long time – a minimum of three years, and possibly as many as five. A lot can change in three to five years, and if you've committed to a Chapter 13 repayment plan, you may think you're locked in no matter what. This doesn't have to be the case.
How Chapter 13 Works
Chapter 13 is typically the choice of debtors who don't want to lose certain assets, such as their homes. When you enter into a court-supervised repayment plan, you can include any past due mortgage payments – or payments toward other secured assets – in the plan. If you continue making your current payments in addition to your Chapter 13 plan payments, you can keep the asset. This is in contrast to a Chapter 7 bankruptcy, where the trustee may liquidate your assets to pay your creditors.
Defaulting on Payments
If you can't keep up with your Chapter 13 payments, you have a few options. If you do nothing and just suspend your payments, the court will dismiss your case. If this happens, you can usually file for Chapter 7 immediately without too much difficulty, although it may affect your automatic stay – the provision of bankruptcy law that prohibits creditors from taking collection measures against you. If you refile within a year after your Chapter 13 dismissal, your stay is typically limited to 30 days. Another alternative is to ask the court to modify your Chapter 13 payments to more accurately reflect your current financial situation. You also have the option of converting your case to a Chapter 7 bankruptcy before the court dismisses it, and if you do this, it should not affect the automatic stay.
Converting to Chapter 7
If you elect to convert to Chapter 7 before the court dismisses your Chapter 13 case, there are a few requirements. You must pass the means test, which determines if you have enough excess income left over after paying your necessary living expenses each month to fund a Chapter 13 plan. If you've suspended your Chapter 13 payments because you can no longer afford them, this requirement may not present a problem. You must also be able to establish to the court's satisfaction that something has changed since you began your Chapter 13 plan – your income has dropped or expenses increased, so the plan payments now present a hardship. Also, you cannot have received a Chapter 7 discharge in the last eight years. If you meet these requirements, you can file a notice with the bankruptcy court to convert to Chapter 7 before the court officially dismisses your Chapter 13 case.
If you filed for Chapter 13 because you wanted to save your home or some other asset, you'll lose this protection if you convert to or refile for Chapter 7. However, if you incurred new debts, such as medical bills, after you began your Chapter 13 plan, they now become eligible for discharge in Chapter 7. Your existing Chapter 13 plan would have had no effect on them.