by: Baran Bulkat, Attorney
Defaulting (failing to make payments) on your Chapter 13 plan has many unfortunate consequences. It can lead to your creditors obtaining permission from the court to foreclose on your house or repossess your car, your case being dismissed, or never even being approved in the first place. (To learn more about the plan, see The Chapter 13 Repayment Plan.)
Let’s take a look at the possible consequences and also any options you may have to save your bankruptcy.
Consequences of Defaulting on Plan Payments
Here's what could happen if you fail to make plan payments.
Your Bankruptcy May Not Get Confirmed
After your bankruptcy case is filed, you are required to appear before a bankruptcy trustee, and sometimes a judge, to determine the feasibility of your proposed repayment plan. Approval by the trustee and the court is called "confirmation." This process sometimes takes many months; however, you are still required to keep your monthly plan payments current prior to confirmation. If you fail to make your plan payments, your bankruptcy case will not get confirmed.
Creditors May Obtain Relief From the Automatic Stay
An automatic stay is created the moment you file bankruptcy. With a few exceptions, this means that creditors are not allowed to initiate or continue any collection activities (such as foreclosure or repossession) against you without requesting permission from the bankruptcy court first. Since most of your creditors get paid through the plan specified in your Chapter 13 bankruptcy, they can obtain relief from the automatic stay (permission to resume collection activities) if you default on your plan payments. (To learn more, see Bankruptcy's Automatic Stay.)
Your Bankruptcy May Get Dismissed
Even if your case has already been confirmed, defaulting on your Chapter 13 payments means risking dismissal of your case. If you miss your monthly plan payments, your bankruptcy trustee will ask the court to dismiss your case for failing to comply with the requirements of your repayment plan. This will result in your case being terminated prior to completion without a discharge of your debts.
What Are Your Options to Save Your Bankruptcy?
Running into financial troubles during the Chapter 13 process is not uncommon. Even if you default on your Chapter 13 payments, this does not mean that your case will automatically get thrown out. You still have options to salvage your bankruptcy and save your property.
Cure Your Default
After the trustee requests dismissal of your case, you can still ask the court for more time to cure your default. This will be your easiest option if you missed a few payments due to an emergency but you are now back on track and can begin to cure your arrearages. Most trustees and judges will grant you additional time if you can show that you can make up your missed payments.
Modify Your Chapter 13 Plan
If your circumstances have changed since filing the bankruptcy (for example if your income decreased due to pay cuts), you may ask the court to modify your plan and reduce your monthly payments. However, this may not be possible if all you are paying through the plan are priority debts and secured debts on property you don’t wish to surrender. (To learn more, see Lowering Your Chapter 13 Plan Payments.)
Reinstate Your Bankruptcy
Even if your bankruptcy is dismissed by the court, you may still be able to reinstate your case. However, you will usually need to do this soon after the dismissal and be required to bring your plan payments current.
Convert to Chapter 7 or Request Early Discharge
You may also be able to convert your bankruptcy from a Chapter 13 to a Chapter 7 (where you receive a discharge without making any plan payments). In order to do this, you must show that you qualify for a Chapter 7 bankruptcy because you cannot afford a Chapter 13 any longer. But keep in mind that a Chapter 7 does not allow you to discharge your priority debts or cure your arrearages so it may not be in your best interest to convert. (To learn more about Chapter 7, see our Chapter 7 Bankruptcy area.)
Similarly, you can request an early Chapter 13 discharge prior to plan completion due to hardship. However, you would be subject to the same limitations as that of a Chapter 7. (To learn more see, The Chapter 13 Hardship Discharge.)
File a Chapter 13 Bankruptcy Again
In most cases you can refile a Chapter 13 immediately following dismissal. But you may be barred from refiling for six months if you disobeyed court orders or voluntarily dismissed your prior case (especially following a creditor obtaining relief from the stay). Also, the automatic stay afforded by your subsequent bankruptcy will be limited to only 30 days if filed within a year of your previous one so you will need to ask the court to extend it.