Unfortunately, not every Chapter 13 Bankruptcy plan that is filed succeeds. In fact, nationwide, only approximately 58 percent of Chapter 13 cases that are filed are successful (See 2021 BAPTCA Report). This is an average and it hides the fact that success rates vary considerably from state to state and district to district. Here in the Eastern and Southern Districts of New York, the success rates are slightly lower at 44 percent and 56 percent respectively. Please note, Chapter 13 cases that are filed without an attorney only have a 2.3 percent success rate. If you are serious about filing for Chapter 13 Bankruptcy, you should always file with an experienced chapter 13 bankruptcy attorney. Even if you file with an attorney, there is a chance your case will either not be confirmed by the court or will fail over time. Our firm, I am proud to mention, has a much higher success rate than the averages mentioned above. So, why do Chapter 13 cases fail?
Reasons a Chapter 13 Case May be Dismissed
Chapter 13 plans typically take up to 5 years to complete. The is a long amount of time for someone to be in a payment plan and many things can happen during that time. There are numerous reasons a Chapter 13 plan may be dismissed. First, the debtor has the right to withdraw their Chapter 13 case and voluntarily dismiss it if they no longer wish to proceed with it. However, if a debtor wants to re-file their Chapter 13 case, they will need to wait 180 days before doing so. This is important to consider if the debtor has an active foreclosure case where a sale date could be scheduled quickly. Withdrawing the case aside, there are two main reasons a Chapter 13 case will be dismissed: (1) the debtor fails to make their plan payments to the Trustee and (2) if the debtor fails to submit the required documentation to the Chapter 13 Trustee. In the Eastern and Southern Districts of New York, the Chapter 13 Trustees use online portals that allow debtors (or their counsel) to submit the necessary and required documents. If a debtor is unable to do so, and this seems to be particularly challenging for pro se debtors, their case will be dismissed.
There are a number of other reasons a Chapter 13 case may be dismissed as well. For example, if the debtor fails to meet deadlines imposed by either the bankruptcy code or by the judge in their cases. This is a major reason that cases filed without an attorney fail. Chapter 13 cases will also be dismissed if the debtor fails to propose a feasible Chapter 13 plan. Additionally, Chapter 13 cases may also be dismissed if the debtor is not current on their secured obligations prior to confirmation, or if they fail to file tax returns or they withhold a copy of their return from the Chapter 13 Trustee.
As mentioned above, one main reason cases are dismissed is for failure to make plan payments to the Trustee. A Debtors’ financial situation can change over the life of their plan. There are numerous reasons why a debtor may fail to make their plan payments. These include: loss of a job, reduction of income, injury leading to the inability to work, illness, retirement, or death of a family member, among other reasons. If a debtor stops making payments to the Trustee in their case, the Trustee will file a motion to dismiss in the Bankruptcy Court. The debtor must then figure out how to address the motion and past due payments.
Conversion vs. Modification vs. Dismissal
No matter what hardship has affected a debtor’s ability to afford their plan payments, they may still have options available to them. First, they may be able to catch up on their plan payments, if they are able to replace the income that was lost. For example, a debtor may have friends or family that will contribute to help them pay their plan. Alternatively, if the cause of the loss of income is temporary and a modified plan will be feasible, a debtor can modify their plan to pay their arrears within the remainder of their plan. If the cause is more permanent and the debtor can still afford to pay their secured and priority debts post-hardship, then they can modify their plan to pay their unsecured creditors less. This is known as a percentage plan. The debtor would also have to turn over any tax refunds they receive for the remainder of the plan to the Trustee. Once the debtor modifies their plan, the Trustee will withdraw their motion.
What if the hardship is permanent and the debtor cannot afford to pay a feasible modified plan? Depending upon what assets they own, a debtor may want to convert to Chapter 7 case. One bit of good news for a debtor in this situation is that the Chapter 7 Means Test requirements no longer applies. However, the Debtor’s budget cannot show disposable income where a feasible Chapter 13 plan payment could still be made. If the debtor has non-exempt assets, they may not want to convert their case as well. However, if their assets are protected by bankruptcy exemptions, conversion to a Chapter 7 will enable them to eliminate their remaining debt and receive a discharge without exposing any of their assets to liquidation. However, if a debtor was using their Chapter 13 bankruptcy to pay back mortgage arrears, conversion to a Chapter 7 will not solve the issue with their mortgage. They may want to seek loss mitigation if it is available, or they may want to refile a Chapter 13 bankruptcy to pay back their mortgage arrears if they can afford it post-hardship. One common situation that we often see in Bankruptcy Court is where a debtor falls behind on their mortgage payments post-petition and is unable to cure their arrears or modify their plan, leading to the dismissal of the case.
If the debtor is unable to either modify their plan, convert their case to Chapter 7, or catch up on their payments, the Trustee’s motion to dismiss will be granted by the Court. Once a Chapter 13 case is dismissed, their debtor loses the protection of automatic stay. Debt collection will resume, and any lawsuits stayed by the filing will continue, including foreclosure lawsuits.
Refiling Chapter 13
Depending upon the nature of the hardship that caused the dismissal, a debtor may want to refile their Chapter 13 case. If the refiling is within 12 months of the filing of the case that was dismissed, the automatic stay will be limited. However, this limited stay can be extended with a motion in the Bankruptcy Court. A Chapter 13 refiling can be advantageous for the debtor who has paid down a good amount of their debt. They will get a new 60-month plan with a potentially much more affordable plan payment.
It is very important for a Chapter 13 debtor to maintain communication with their attorney, who may be able to prevent the dismissal of the debtor’s case. At the Law Offices of David I. Pankin, P.C., we have a high success rate for our Chapter 13 cases. We have over 25 years of experience in guiding debtors through the Chapter 13 process. If you have any questions about Chapter 13 bankruptcy, please do not hesitate to contact our offices at (888) 529-9600 or by using our easy online contact form.