Introduction
Filing for Chapter 13 bankruptcy can provide powerful relief from foreclosure, creditor collection efforts, as well as wage garnishments and frozen bank accounts. While a Chapter 7 bankruptcy eliminates debts and provides a fast fresh start, Chapter 13 allows individuals with disposable income to restructure their debts into a three-to-five-year court-approved repayment plan that creditors must accept.
Upon filing a bankruptcy case, a debtor receives the protection of the automatic stay, which ceases all collection and related collection processes (including foreclosure lawsuits and sale dates). Depending on various factors, a debtor may only have to pay a fraction of their total debt in a Chapter 13 payment plan. Most debts are repaid interest-free, and the debtor only pays on the debts where creditors have filed a timely and proper proof of claim with the court.
Chapter 13 vs. Debt Settlement
Chapter 13 bankruptcy is typically a much better debt relief option compared to debt settlement programs. Creditors are bound by the terms of a confirmed Chapter 13 plan, even if they would prefer different payment arrangements. In contrast with debt settlement which is optional for creditors and has no automatic stay, chapter 13 filing prohibits the continuation of all debt collections efforts, including lawsuits and the enforcement of judgments. Furthermore, there are no negative tax consequences from a Chapter 13 bankruptcy.
The success rate for Chapter 13 bankruptcy can be relatively low, but not as low as debt settlement programs. The low success rate for Chapter 13 bankruptcy is related to the large number of filings that are pro se i.e. they were filed without an attorney. (Our office, it should be noted, has both high confirmation and success rates). Many debtors file Chapter 13 bankruptcy without an attorney, often to stop a foreclosure sale date. Such cases are usually not successful, since the people filing these cases have no intention of completing the process. Debt settlement on the other hand is often not successful, because as debtors are paying into their program, their creditors are not being paid while their debt negotiations are pending and many refuse to negotiate or will only modestly discount any debt balance. Nonpayment to creditors will often eventually lead to stressful lawsuits and judgments which can enable a creditor to garnish a debtor’s wages or freeze bank accounts. Despite advertising to the contrary, debt settlement also significantly impairs a credit score as well and is very expensive in that the companies charge up to 25% or more of the outstanding balances as their fee which when you add back to the settlement strongly reduces the chances of obtaining any meaningful savings.
Mention Tax consequences or TMI?
What Does It Mean When a Chapter 13 Case Is Dismissed?
The dismissal of a Chapter 13 bankruptcy matter ends the case without a discharge and any outstanding debt from the time of the filing will still be owed. When a case is dismissed, the protections of the automatic stay are lifted, allowing creditors to resume collection activity, foreclosure proceedings, repossession efforts, lawsuits, and wage garnishments. In some situations, a dismissed case can be refiled. However, repeated filings will result in limitations on the automatic stay and increased scrutiny from the bankruptcy court, the Chapter 13 Trustee assigned to the case and potentially, the United States Trustee.
When filed properly with an experienced attorney, a Chapter 13 bankruptcy can have a strong chance of success. Upon the successful completion of a Chapter 13 plan, a debtor receives a discharge of the eligible debts that prevents any additional collection of the debts covered by the discharge order. The filing of a Chapter 13 case is only the beginning of the process. Many Chapter 13 cases are dismissed before the debtor successfully completes their plan and receives a discharge. Understanding why dismissals occur can help individuals avoid common mistakes and improve their chances of successfully completing their bankruptcy case. Working with an attorney who has experience with Chapter 13 bankruptcy is key to avoiding dismissal. Chapter 13 bankruptcy is a complicated process, and it can be insurmountable for a debtor to complete on their own. Retaining an experienced bankruptcy attorney, can help you “win the battle, before it is fought,” since they can guide you through the complex process that is Chapter 13 bankruptcy.
Failure to Make Chapter 13 Plan Payments
The most common reason Chapter 13 cases are dismissed is the failure to make required plan payments. A Chapter 13 repayment plan requires debtors to make regular monthly payments to the Chapter 13 trustee. These payments are then distributed to creditors according to the terms of the confirmed plan.
Life circumstances can change during a three-to-five-year repayment period. Job loss, reduced income, medical emergencies, divorce, or unexpected expenses can make it difficult to stay current on payments. If a debtor falls behind and cannot catch up or modify the plan, the trustee may file a motion to dismiss the case.
Failure to Make Ongoing Mortgage Payments
One of the most common reason debtors file for chapter 13 bankruptcy is to stop or prevent a foreclosure proceeding. Chapter 13 bankruptcy enables a homeowner to stop a foreclosure action and pay outstanding mortgage arrears though a payment plan that can be up to 60 months long and is typically interest free. In fact, for debtors that can afford this, it’s almost a guaranteed way to keep a home in foreclosure. While the repayment plan may address past-due mortgage payments, debtors must resume making their regular monthly mortgage payments as well after filing. Falling behind on these ongoing payments can result in creditor motions for relief from the automatic stay for nonpayment and may ultimately lead to dismissal of the bankruptcy case.
Failure to Provide Required Documents
The bankruptcy process requires significant financial disclosure and documentation. Debtors may be required to provide the following types of documentation to the Chapter 13 Trustee:
- Photo ID
- Social Security Card
- Tax returns
- Pay stubs
- Bank statements (for plans that pay less than 100% of the debt)
- Proof of non-W2 income (for example, lease agreements, affidavits of contribution)
- Business operating reports
- Proof of ongoing contractual obligations (proof of mortgage, vehicle, or rental payments, etc.)
- Other financial documents requested by the trustee
Failure to provide the requested documents in a timely manner can prevent the trustee from properly administering the case and determining feasibility of the plan and therefore may result in a motion to dismiss the case.
Failure to File Required Tax Returns
The Bankruptcy Code requires debtors to be current with certain tax filing obligations before a Chapter 13 plan can be confirmed. If required tax returns have not been filed, the trustee may seek dismissal of the case. Debtors should work with their attorney and tax professional to ensure all necessary returns are filed as early as possible in the bankruptcy process.
Failure to Attend Required Hearings
Chapter 13 debtors are required to attend a Meeting of Creditors, often called a “341 Meeting.” However, in most cases, creditors do not actually appear at the hearing. The hearing is mandatory and provides the Trustee with an opportunity to question a debtor about their petition and plan. Failure to appear at the meeting will most likely lead to a motion to dismiss. Attending a hearing has never been easier since they are now conducted remotely via Zoom, and they do not involve a trip to the Bankruptcy Courthouse.
Inaccurate or Incomplete Bankruptcy Filings
Honesty and accuracy are critical in every bankruptcy case. Errors, omissions, or inaccurate information in bankruptcy schedules, statements, and other filings can create serious problems. In some situations, mistakes can be corrected through amendments. However, significant inaccuracies or failures to disclose assets, income, debts, or financial transactions may result in dismissal and, in severe cases, allegations of bankruptcy fraud.
Many Chapter 13 cases are incomplete when filed and some are even filed as a “skeleton petition” when filed on an emergency basis to stop such actions such as a foreclosure sale date. They are often missing critical information, statements, schedules, a plan and documents required under Section 521 of the Bankruptcy Code. If the debtor does not correct these deficiencies within 45 days of the filing of the petition, the case will be automatically dismissed. The debtor can request up to an additional 45 days to comply with the Bankruptcy Code and file the required documents to prevent the dismissal.
Failure to Confirm a Chapter 13 Plan
Not every proposed repayment plan receives court approval. A chapter 13 plan may face objections from:
- The Chapter 13 trustee
- Mortgage lenders
- Vehicle lenders
- Other creditors
A debtor must propose a feasible plan in a Chapter 13 bankruptcy. They must document that they can afford the chapter 13 plan payment along with their other monthly household expenses and obligations. Common issues that lead to non-feasibility include: insufficient income, improper treatment of creditors, or failure to satisfy Bankruptcy Code requirements. If these issues cannot be resolved and the plan is not feasible, the court may deny confirmation, and this will ultimately result in a motion to dismiss the case.
Significant Changes in Financial Circumstances
Even debtors who begin their cases with a viable budget may encounter unexpected challenges including:
- Job loss
- Reduced work hours
- Serious illness
- Disability
- Family emergencies
- Increased living expenses
When such financial circumstances change, it may be possible to modify the Chapter 13 plan or in certain cases to convert the case to Chapter 7. However, if the debtor can no longer maintain a feasible repayment plan, dismissal may become unavoidable.
Can a Chapter 13 Case Be Saved from Dismissal?
Depending on the circumstances, debtors may be able to:
- Catch up on their missed plan payments and/or post-petition mortgage payments
- Modify the repayment plan
- Convert the case to Chapter 7
The available options depend on the specific facts of the case, and the debtor’s financial circumstances. In some cases, it might make sense to let the case get dismissed and refile a new Chapter 13 case.
How an Experienced Bankruptcy Attorney Can Help
Chapter 13 bankruptcy can be a highly effective method for reorganizing debt or stopping a foreclosure action, but it requires ongoing compliance with court requirements and repayment obligations. Experienced legal counsel can help identify potential issues early on and improve the likelihood of successfully completing a Chapter 13 plan. Every debtor’s situation is unique. An attorney can review your circumstances, explain your options, and help determine the best path forward for achieving lasting debt relief.
Frequently Asked Questions
What happens if my Chapter 13 bankruptcy case gets dismissed?
Dismissal ends the case without a discharge, so any debt you owed when you filed is still owed. It also lifts the automatic stay, which means creditors can go right back to collecting: resuming foreclosure, repossession, lawsuits, and wage garnishments. In some cases you can refile, but repeat filings bring closer scrutiny from the court and the trustee.
What’s the most common reason Chapter 13 bankruptcy cases get dismissed?
Missing plan payments. Once your Chapter 13 plan is confirmed, you’re required to make regular monthly payments to the trustee, who distributes them to your creditors. A job loss, medical emergency, or any other financial setback over your three-to-five-year plan can throw that off, and if you fall too far behind without catching up or modifying the plan, the trustee can move to dismiss the case.
Can Chapter 13 bankruptcy still stop foreclosure if I’m behind on my mortgage?
Yes, that’s actually one of its biggest advantages. Chapter 13 lets you catch up on missed mortgage payments through the plan, typically over as long as 60 months and interest-free, all while stopping a scheduled foreclosure sale. The catch is you also have to keep making your regular ongoing mortgage payments after filing. Falling behind on those separately can lead to a motion for relief from the stay, which puts the case at risk of dismissal.
What’s the difference between Chapter 7 and Chapter 13 bankruptcy if my case is at risk of dismissal?
If your Chapter 13 plan becomes unaffordable because of a job loss or other financial hardship, converting to Chapter 7 is sometimes an option instead of letting the case get dismissed outright. Chapter 7 doesn’t involve a repayment plan the way Chapter 13 does, so it can be a way out when sticking to your original plan is no longer realistic.
Can I file Chapter 13 bankruptcy again after a dismissal?
In many cases, yes, but refiling isn’t automatic or risk-free. Repeated filings tend to draw closer scrutiny from the bankruptcy court, the Chapter 13 trustee, and potentially the U.S. Trustee, and your automatic stay protections may be more limited the second time around. Working with an experienced attorney before refiling can help you avoid the same mistakes that led to the first dismissal.
Contact The Law Offices of David I Pankin, PC
If you have questions about Chapter 13 bankruptcy, contact our office today to schedule a free consultation. We can evaluate your options and help you protect your financial future. We can be contacted at (888) 529-9600 or by using our easy online contact form or remote consultation scheduling system. Remember, bankruptcy is not the end, it’s a new beginning.
