A Chapter 13 bankruptcy case protects you from creditor collection actions and lawsuits, while it offers a plan to repay a portion of your debts. A court-appointed trustee draws up a repayment plan, relying on information you provide about your disposable assets and income. The trustee, as a court administrator and party to the case, may file a motion to dismiss the bankruptcy. If the court agrees, you lose the law's protections and return to financial square one. However, you have several options that may return you to good standing before the court dismisses the case.
Falling Behind on the Plan
A trustee will move to dismiss a Chapter 13 case if you are unable to keep up the monthly payments under your replayment plan. This is the fate of many Chapter 13 cases, and each trustee has a system in place to deal with it. If you want to keep your protections, you will have to either catch up on the delinquent payments or re-negotiate the plan. The latter is only possible if your financial situation has changed; for example, you've lost your job, you're going through a divorce or you've incurred a significant new debt, such as medical bills. Trustees will generally work with creditors to keep the plan in effect.
Objecting to a Dismissal
You can object to the trustee's motion to dismiss and request a hearing in court. You must spell out your objections in a response, in which you lay out your case that the trustee has acted in bad faith or is relying on inaccurate information. If the problem is inability to repay your creditors, you can request that the court modify your plan. You must document any changes in your income that makes a reduced payment, or more time to make the payments, necessary. You can also request a hardship discharge, which clears the slate of non-priority debts but doesn't touch priority claims such as taxes and child support.
The Do-Nothing Option
You may simply decide not to contest the motion and allow the court to dismiss the case. This is to your advantage if your financial affairs have significantly improved under the court's protection, and you now believe that full repayment of your creditors is possible. It's better to be out of bankruptcy than in it, and a dismissal can get you back on track to financial normalcy. You will have to work with creditors who still hold your debts, contact the IRS to get any liens or garnishments lifted, and negotiate with lenders to restore any secured loans on cars and homes. This will be easier if you've managed to keep up required payments while the Chapter 13 was in effect.
Refiling or Converting
If the court grants the trustee's motion to dismiss your case, you have the option to file a new Chapter 13. You must be prepared to meet the repayment terms in a new case, however. You also have the option of converting to a Chapter 7 bankruptcy case, if your income qualifies you according to federal law. In Chapter 7, you are still protected by the court's automatic stay, but there is no repayment plan. Instead, your non-exempt assets can be seized and liquidated by a court trustee to repay your creditors; your priority debts survive, but the court will discharge remaining unsecured debts at the end of the case.
References & Resources
- BananaStock/BananaStock/Getty Images