One advantage of filing a Chapter 13 case is that you can get out of it “at any time.” But what happens if you do dismiss your case?
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Dismissing a Chapter 13 case has big consequences, some of which are immediate, and some potentially dangerous to you. Although you get the benefits of no longer being under the control of the bankruptcy court and trustee, you also lose the immediate protection and long-term opportunities of Chapter 13. Dismissal is a relatively drastic step among a number possible one to consider if your circumstances change. But it can be useful tool when used in the right situation, with a full understanding of how it works.
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The Handy Right to Dismiss
Chapter 13 comes with a right to dismiss. This means that at any point of your case you can get out of the case and out of the bankruptcy system altogether. Since this type of bankruptcy generally takes three to five years to complete, and involves projecting your income and expense that far out into the future, you’re only being sensible to ask what happens if your financial circumstances change during that period.
There are a number of other options for dealing with changes in your income and expenses, such as making adjustments in your Chapter 13 plan, or converting your case into a Chapter 7 one. There’s even something called a “hardship discharge” which in limited circumstances allows you to complete your case early. We’ll look at these other options in future blogs.
Dismissing your case is probably the most extreme of all the options. But it can be the best one in some situations. So knowing that you have this right to dismiss can make Chapter 13 a more attractive choice when you are trying to decide what type of bankruptcy to file.
The Practical Consequences
If you dismiss your case, here are some of the main consequences:
- Once the bankruptcy judge signs the order dismissing your case, you no longer need to make payments under the Chapter 13 plan, and neither the court nor the Chapter 13 trustee has any further jurisdiction over your income, your tax refunds, or anything else addressed in your Chapter 13 plan.
- You lose the immediate benefit of being in a bankruptcy case, the “automatic stay” preventing your creditors from collecting on their debts and repossessing or foreclosing on any collateral. So before dismissing your case, be sure you know how each of your creditors is likely to act in response to the dismissal.
- Because under Chapter 13 you do not get a discharge of your debts until successful completion of the case, if you dismiss your case you will owe all your creditors as before except to the extent that they received payments during the case. Most interest and penalties stopped during the Chapter 13 case will usually be able to be added onto your debts, including for the period of time that you were in the case.
When Dismissal is Nevertheless Appropriate
If the consequences of dismissal sound pretty bad, often they can be. So why would somebody ever want to dismiss their Chapter 13 case? Simply because in some peoples’ situations the advantages of dismissal outweigh any disadvantages. Chapter 13 cases can take such different forms and be filed for so many different reasons that it’s impossible to give a neat and tidy answer to this. So here is one scenario that illustrates when a dismissal can be the best choice.
Assume that a single mom with a young child has a vehicle loan, a home mortgage, and owes back income taxes. During a period of 10 months of unemployment she had managed to keep current on her vehicle loan because that was her absolutely highest priority. But while she was unemployed she could only do this and still take care of her necessary living expenses by not paying her mortgage. So she fell behind 10 payments of $1,500, or a total of $15,000. She also owed $2,000 to the IRS for the prior year’s income taxes because of not paying any withholding on her unemployment benefits. So she filed a Chapter 13 case a year ago in order to have three years both to catch up on that $15,000 mortgage arrearage and to pay off the income tax. She continued paying the vehicle loan so she’s still current on that.
But now she got a job offer in a neighboring state, where her parents live, who could help raise her child. So she’s ready to surrender the home to the mortgage company, and under the terms of her mortgage she would owe them nothing if she did so. The income from her new job would be enough to allow her to continue making her vehicle payments, and to set up an installment payment plan with the IRS to pay off the tax debt outside of bankruptcy. With her changed circumstances, and all her creditors taken care of, a dismissal of her Chapter 13 case would be appropriate and the best option here.