If you are married and are in a Chapter 13 case with your spouse, what are the options for one or both of us changing or leaving the case?
A Chapter 13 “adjustment of debts” case usually lasts three to five years. A lot can happen in that length of time. If you filed the case jointly with your spouse but are now experiencing marital difficulties, what are your options?
There are many ways to get out of a jointly filed Chapter 13 case.
Dismissal
You can almost always dismiss a Chapter 13 case. That is, you can just voluntarily end the jointly filed case.
A Chapter 7 is different in this respect. You have to get permission from the bankruptcy judge to dismiss a Chapter 7 case, and that may be difficult to pull off.
Bankruptcy law recognizes that committing to a Chapter 13 case is a big deal. To encourage debtors to make the commitment, the law allows them to freely leave it if they want to later. A person is more likely to sign up knowing from the beginning that he or she is not stuck in it.
So if your circumstances have totally changed, such as if the two of you are now on the brink of divorce, your attorney can file a simple motion for the dismissal of the case. In most cases it is granted quickly and almost automatically.
Once your joint Chapter 13 case is dismissed, from there each spouse or ex-spouse can decide what is best for him or her—a new individual Chapter 13 case, a Chapter 7 “straight bankruptcy” case, or neither.
Conversion to Chapter 7
Your joint Chapter 13 case can also be converted into a joint Chapter 7 case. The reasons that Chapter 13 made sense earlier may no longer. For example, you may have chosen to save the family home from foreclosure, but if you are getting divorced that may be both less important and less financially feasible. Converting the case into a Chapter 7 one can get it completed within another three or four months, timing that’s probably more consistent with your changed circumstances. And it results in a discharge (legal write-off) of all or most of your debts, which would not happen with a simple dismissal of the Chapter 13 case.
Severing a Chapter 13 Case into Two Separate Cases
Your joint Chapter 13 case can be “severed” into two separate Chapter 13 ones. This is routinely permitted by the bankruptcy court, especially if the spouses are contemplating divorce.
Once the case is severed into a separate case for each person, then each can independently do whatever is in his or her best interest.
One person may have a good reason to continue under Chapter 13—such as if her car was being paid through a favorable cramdown, or if his personal income taxes were being paid through the plan without additional interest, penalties, or threat of collections by the IRS or the state. So that person (or both independently) could file a new amended Chapter 13 plan incorporating the changed circumstances.
Either person may instead convert his or her case into a Chapter 7 one (regardless what the other person does) if there’s no more reason for being in Chapter 13. Or both can. If both convert to Chapter 7 after the Chapter 13 case is severed, the effect of this may or may not be at all different than if the joint Chapter 13 case were simply converted into a joint Chapter 7 case. But here the two cases would be administered separately, with each person presenting different lists of assets, debts, income, expenses and all the other required information.
Either person can also, after the case is severed into two, dismiss his or her case. Because that results in no discharge of debts (since that does not happen under Chapter 13 until a successful completion of a case) an outright dismissal seldom makes sense. It generally leaves the person with a pile of unresolved debts. So a dismissal is usually combined with some other alternative, such as a later filed new Chapter 7 or 13 case.
Conflict of Interest and Client Secrets Issues
Attorneys are ethically not allowed to represent two people at the same time who have interests that are in conflict with each other. Nor can they simultaneously represent two people who will likely each share secrets or confidences with the attorney that need to be kept from the other person.
When two spouses are seriously considering divorce, their interests can often diverge. And in the course of talking with one spouse the attorney may well be told things that spouse doesn’t want the other spouse to hear.
So at some point the attorney can no longer represent both of these spouses. At that point, the spouses have to get independent legal advice about how to make the choices discussed above about their jointly filed Chapter 13 case.