As my colleagues and I have discussed in previous blogs, a normal Chapter 13 bankruptcy case consolidates your debts and allows you to repay at least a portion of those debts over a period of up to 5 years. As the saying goes, life can come at you fast, and a lot can happen in 5 years. In today’s blog, I’d like to discuss some of the situations in which you may or may not want to continue your Chapter 13 case for 5 years’ time.
How Chapter 13 Bankruptcy Works
A Chapter 13 case is also known as a “reorganization bankruptcy.” It allows you to restructure how your debts are repaid, so you are not bound by the same payment schedule as your original contract. Perhaps you fell behind on a mortgage due to an illness or injury and you need some help catching up the arrearage. Chapter 13 is perfect for that situation because it allows you to repay the arrearage in monthly payments, instead of needing a lump sum to satisfy the mortgage company. But, once that arrearage has been fully paid through the court, why stay in a Chapter 13 case?
In a Chapter 13 case, secured debts like mortgages or vehicle loans, are entitled to be paid before unsecured debts, like credit cards or hospital bills. So in most cases, after you’ve finished paying off mortgage arrears or vehicles, there will still be debt left. Technically, you can’t be forced to remain in a Chapter 13, so you could voluntarily end your case after the secured debts are paid. You may think to yourself, “This mortgage arrearage was the reason I filed Chapter 13. Now that it’s been paid I don’t need to be in bankruptcy anymore.” However, a Chapter 13 bankruptcy case provides additional benefits that might not be readily apparent.
Additional Benefits of a Chapter 13 Bankruptcy
First, leaving your case early will result in losing your opportunity for a bankruptcy discharge. A discharge is one of the most powerful tools in the bankruptcy system. A discharged debt is one that cannot be collected on anymore. Unsecured debts are typically paid only a portion of their full amount, while the remainder is discharged. Secured debts are typically paid with an interest rate set by the Court, not the interest rate on the original sales contract. If you don’t receive a discharge, then the Court may show your vehicle as having been paid, but the creditor will still consider you to owe more money.
Second, in addition to often being paid at less than full value, unsecured debts are typically paid without any interest at all in a Chapter 13 case. If you leave your case early, all of the interest rates that you avoided by filing your case will come back and be added to your total debt. It makes more financial sense to stay in you case and finish your payment plan since you’ll be saving money.
Why You May Want to Leave Chapter 13
However, in some situations it does make sense to leave Chapter 13. Suppose you filed a case to protect your car from repossession after you’d fallen behind on payments. Two years later, if the car is totaled and insurance pays it off, then it may be a better idea for you to leave the case. You could convert your Chapter 13 to a Chapter 7 and discharge the remainder of your debt. Or, you could dismiss your case entirely to avoid getting a discharge. As I mentioned in my last blog post, you are limited by the Bankruptcy Code on how often you can obtain a discharge of your debt. Depending on your financial situation you may want to avoid a discharge in order to preserve your right to get one in the near future.
Ultimately, you need to consult with an experienced bankruptcy attorney before filing a Chapter 13 case or making any drastic changes to an existing case. At Bond & Botes, our attorneys have years of experience handling all types of debts for consumers across Alabama, Tennessee, and Mississippi. If you have taxes or other debts causing you financial stress, please contact one of our convenient office to set up a free initial consultation. We will meet with you personally to help plan your way back to financial peace.
Nick Gajewski is an Associate Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Arts from the University of Alabama, and a Juris Doctorate from the University of Alabama School of Law. Nick joined the team of Bond & Botes bankruptcy lawyers back in 2014 and has been helping clients navigate financial issues since. Read his full bio here.