Can You Cancel a Chapter 13 Bankruptcy?
Understand the pathways to ending a Chapter 13 bankruptcy case, whether by choice or court action, and the resulting legal status.
Chapter 13 bankruptcy offers individuals with consistent income a structured pathway to manage and repay their debts through a court-approved repayment plan, typically spanning three to five years. While a Chapter 13 plan aims for completion, various life changes can lead debtors to consider terminating their case earlier. This article explores how a Chapter 13 bankruptcy case can conclude before the full repayment plan is executed.
Voluntary Dismissal of a Chapter 13 Case
A debtor has a statutory right to voluntarily dismiss their Chapter 13 bankruptcy case at any point. This right is granted under Bankruptcy Code Section 1307(b), unless the case was initially converted from another chapter, such as Chapter 7 or 11. Voluntary dismissal provides debtors flexibility if their financial situation improves or the Chapter 13 plan is no longer suitable. This right cannot be waived, even if a debtor signs a contract attempting to do so.
To initiate a voluntary dismissal, the debtor files a formal document, such as a motion or notice of dismissal, with the bankruptcy court. This document informs the court and the Chapter 13 trustee of the debtor’s decision. While the motion does not require a detailed explanation, it must disclose whether any motions for relief from the automatic stay have been filed. Upon receiving a valid request, the court issues an order dismissing the case.
Involuntary Dismissal by the Court
A Chapter 13 bankruptcy case can also be involuntarily dismissed by the court when a debtor fails to meet obligations set forth by the Bankruptcy Code or the court. Common reasons include the debtor’s failure to make timely plan payments to the Chapter 13 trustee, a frequent cause for dismissal.
Other grounds for involuntary dismissal involve non-compliance with court orders or failure to file required documentation. This can include not submitting financial information, such as tax returns or pay stubs, when requested by the trustee, or failing to attend mandatory hearings like the meeting of creditors. If a debtor materially defaults on their confirmed plan, beyond just missed payments, the court may also consider dismissal. The Chapter 13 trustee or a creditor will file a motion to dismiss, and the court will schedule a hearing to determine if dismissal is warranted based on the evidence and relevant legal criteria.
Converting a Chapter 13 Case
As an alternative to outright dismissal, a debtor in a Chapter 13 case can convert their case to another chapter of bankruptcy, most commonly Chapter 7. The Bankruptcy Code grants the debtor an absolute right to convert to Chapter 7 at any time, provided they meet Chapter 7 eligibility requirements. This includes passing the Chapter 7 means test, which assesses a debtor’s income and expenses to determine if they have sufficient disposable income to repay debts through a Chapter 13 plan. If the debtor’s income is below their state’s median income for their household size, they qualify for Chapter 7.
Converting a case involves filing a “Motion to Convert Chapter 13 Case to Chapter 7” with the court. Debtors must submit updated schedules and forms, detailing assets, liabilities, income, and expenses, to align with Chapter 7 requirements. Upon conversion, a new Chapter 7 trustee is appointed to oversee the case, replacing the Chapter 13 trustee. The case then proceeds under Chapter 7 rules, and the Chapter 13 plan becomes inactive.
Legal Status Following Case Termination
The termination of a Chapter 13 bankruptcy case, whether through dismissal or conversion, alters the legal status of debts and creditors. Upon dismissal, the automatic stay, which previously halted collection efforts, is immediately lifted. This allows creditors to resume actions such as collection calls, lawsuits, wage garnishments, repossessions, and foreclosure proceedings. Debts that were part of the Chapter 13 plan and not discharged through its completion revert to their pre-bankruptcy status, meaning the debtor is fully liable for the original amounts, including any accrued interest or penalties.
Payments made to the Chapter 13 trustee prior to dismissal are disbursed to creditors according to the proposed or confirmed plan. In some limited circumstances, funds may be returned to the debtor, depending on court orders and the nature of the funds. When a case is converted to Chapter 7, the Chapter 13 plan is no longer in effect, and the case transitions to a liquidation process. The goal shifts to discharging eligible debts, and creditors’ rights are governed by Chapter 7 rules, which may involve the liquidation of non-exempt assets to satisfy claims.