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. Or the court might dismiss your case or never approve it in the first place. Learn about some of the possible consequences you could run into if you don't make a Chapter 13 repayment plan payment, as well as options to save your bankruptcy.
Here's what could happen if you fail to pay your payments.
After filing your bankruptcy case, the bankruptcy court will determine the feasibility of your proposed repayment plan. Even though this "confirmation" (approval) process sometimes takes many months, you'll start making payments approximately a month after you file, and you'll keep your monthly plan payments current before confirmation. If you don't make your plan payments, your bankruptcy case will not get confirmed.
Confirmations often get delayed when the trustee or creditor objects to the original proposed Chapter 13 plan. If the amount confirmed is higher—which it usually is—the plan payment will be adjusted so that you can complete the plan within the agreed-upon three- or five-year repayment period.
An automatic stay is put into place the moment you file for bankruptcy. With a few exceptions, the automatic stay prevents creditors from initiating or continuing collection activities (such as foreclosure or repossession) without requesting permission from the bankruptcy court first. Since most of your creditors get paid through the Chapter 13 plan, they can obtain relief from the automatic stay (permission to resume collection activities) if you default on your plan payments. A creditor makes the request by filing a motion to lift the stay.
Even if the court already confirmed your case, you'll risk dismissal if you default on your Chapter 13 payments. The bankruptcy trustee will ask the court to dismiss your case for failing to comply with repayment plan requirements and, if granted, the court will terminate your case without a discharge of your debts (qualifying debts won't get wiped out).
Running into financial troubles during the Chapter 13 process is not uncommon. Even if you default on your Chapter 13 payments, your case won't automatically get thrown out. You'll still have options to salvage your bankruptcy and save your property.
After the Chapter 13 trustee requests dismissal of your case, you can still ask the court for more time to cure (catch up on) your default. This option is easiest 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.
If your circumstances have changed since filing the bankruptcy (for example, if your income decreased due to a pay cut), you may ask the court to modify your plan and reduce your monthly payments. However, this might 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. Because you must pay these debts in full, the court won't be able to lower your Chapter 13 plan payments.
Even if the court dismisses your bankruptcy, you might be able to reinstate your case. However, you will usually need to do this soon after the dismissal, and you'll be required to bring your plan payments current.
You might also be able to convert your bankruptcy from a Chapter 13 to a Chapter 7 (you’ll receive a discharge without making any plan payments). 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 Chapter 7 does not allow you to discharge your priority debts or cure your arrearages, so it might not be in your best interest to convert.
Similarly, you can request an early Chapter 13 hardship discharge. However, you would be subject to the same limitations as that of Chapter 7.
In most cases, you can refile a Chapter 13 immediately following dismissal. But you might be barred from refiling for six months if you disobeyed court orders or voluntarily dismissed your prior case, especially after a creditor obtains relief from the stay. These types of filing prohibitions occur when the court dismisses your case "with prejudice." 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.
Learn more about multiple bankruptcy filings.