A chapter 13 bankruptcy can allow someone under extreme financial pressure the breathing room needed to reorganize his debts and get out of his financial hole. In many cases, a debtor can stay in his home and keep his car and personal property under a Chapter 13 bankruptcy. When a Chapter 13 case is dismissed before discharge, however, it can put the debtor at risk of losing everything.
Benefits of a Chapter 13
Consumers can file petitions for relief under either Chapter 7 or Chapter 13 of the U.S. Bankruptcy Code. A Chapter 7 filing seeks to liquidate assets, pay as much debt as possible and discharge any remaining eligible debt. Under Chapter 13, the debtor has the benefit of receiving court permission to reorganize her debts and establish a plan to pay them completely or in part over a period of three to five years. A Chapter 13 filing will also put an immediate stop to foreclosure and collection proceedings, potentially allowing the debtor to save her home.
Reasons for Dismissal
If a debtor fails to make his Chapter 13 plan payments, the trustee will ask the court to dismiss the case. The court will also dismiss a debtor's Chapter 13 case for other reasons, such as the debtor's failure to participate in credit counseling, submit or correct necessary forms, or attend meeting of the creditors.
Effects of a Dismissal
When a Chapter 13 bankruptcy has been dismissed, creditors are legally permitted to resume any collection activities they undertook prior to the filing of the petition. A foreclosure that was stopped by the bankruptcy may now be restarted and a stripped second mortgage may be reinstated. In addition to starting collection efforts again, creditors may also add interest and fees retroactive to the date the petition was filed.
Options After a Dismissal
If a Chapter 13 case is dismissed prior to discharge, a debtor may have a few options. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 gives Chapter 13 debtors the right to refile after dismissal. If, however, the court determines that a debtor is abusing the bankruptcy process, he may be prohibited from refiling. The same statute also prohibits a debtor from refiling a Chapter 13 petition if he voluntarily dismissed a prior case after a creditor filed a motion for relief. Even if the debtor is permitted to refile, the automatic stay which protects a debtor from collections and foreclosure may be limited to 30 days. If it is not possible to keep up with the Chapter 13 payment plan, a debtor has the right to convert his case to a Chapter 7 liquidation bankruptcy.