Failing to make your Chapter 13 bankruptcy plan payments can have significant consequences, as the success of a Chapter 13 case hinges on your ability to follow through with the agreed-upon repayment plan. Here’s what could happen if you find yourself unable to keep up with your plan payments:
1. Grace Period and Trustee Discretion
Initially, if you miss a payment, the bankruptcy trustee (the person responsible for overseeing your case) may provide a short grace period to catch up. Trustees understand that temporary financial setbacks can occur. However, this discretion varies by trustee and district, and it’s not a long-term solution.
2. Motion to Dismiss Your Case
If you continue to miss payments without making arrangements to address the shortfall, the trustee or a creditor may file a motion to dismiss your Chapter 13 bankruptcy case. Dismissal releases you from the protection of bankruptcy, meaning creditors can resume collection actions against you, including foreclosure, repossession, wage garnishment, and lawsuits.
3. Opportunity to Modify Your Plan
If your financial situation has changed significantly, making it impossible to keep up with your current plan payments, you may petition the court to modify your plan. Modifications can include extending the term of your plan (up to a maximum of five years), reducing the amount paid to unsecured creditors, or adjusting payments based on a decrease in income or unexpected expenses. However, approval of modifications depends on demonstrating that the changes in your financial situation are significant and beyond your control.
4. Hardship Discharge
In rare cases, if you cannot continue your Chapter 13 plan payments due to circumstances beyond your control and modification of the plan is not feasible, you might qualify for a hardship discharge. To qualify, you must prove that the creditors have received as much as they would have in a Chapter 7 liquidation case, the inability to complete the plan is due to circumstances beyond your control, and modification of the plan is not possible. A hardship discharge is more limited than a full Chapter 13 discharge and does not apply to all types of debts.
5. Conversion to Chapter 7
Another option might be to convert your Chapter 13 case to a Chapter 7 bankruptcy. This can be a viable path if you can no longer afford to make any payments towards your debts. Conversion may lead to the liquidation of some of your assets to pay creditors, but it can also result in the discharge of qualifying debts. Not everyone is eligible for conversion, especially if you have disposable income that could be used to pay creditors under Chapter 13.
6. Voluntary Dismissal
If none of the above options are viable or desirable, you have the right to request a voluntary dismissal of your Chapter 13 case. However, this means losing bankruptcy protection and returning to square one regarding your debts, with creditors free to pursue collection actions.
Failing to make Chapter 13 plan payments puts your bankruptcy case and financial recovery at risk. It’s crucial to communicate with your bankruptcy attorney and the trustee at the first sign of financial trouble. Proactively seeking a modification, exploring a hardship discharge, or considering conversion to Chapter 7 can provide alternatives to dismissal and help you navigate through financial difficulties while still working towards debt relief.
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