Although filing chapter 13 bankruptcy is a good way to deal with debt, sometimes a change in life circumstances makes it impossible to continue making the plan payments. Though the bankruptcy court lets you make adjustments to your plan to account for things that may happen in your life, this may not be enough to fix the problem. If you're stuck in this situation, here are two possible resolutions.
Request a Hardship Discharge
One way to deal an inability to complete your bankruptcy plan is to request a hardship discharge. If approved, the court will close your case and discharge your debts. To qualify for this option, you must meet three requirements:
- Circumstances beyond your control make it impossible for you to continue making your plan payments. This can include losing a job, falling ill, or suffering a permanent disability that eliminates your ability to work. You'll need to submit evidence to the court (such as medical reports) to support your case.
- Your payment plan cannot be modified to fix the problem. For instance, plans can only last for a maximum of 5 years. If adjusting your plan causes you to go beyond this time limit, then your case would qualify.
- You've made enough payments into the plan that your creditors received as much money as they would have if you'd filed a chapter 7 bankruptcy.
The major drawback to this option is that not all of your debts will be wiped away by the discharge, only the non-priority, unsecured debts that can be eliminated by bankruptcy, such as credit card debt. If you have:
- Secured debts like a car or home loan
- Debts not listed on your bankruptcy papers
- Student loans
- Some state and federal taxes
- Child support and alimony debt
- Personal injury lawsuit judgment from a DUI/DWI
- Debts incurred through fraud or theft
you will still owe them, and creditors will be able to resume collection activities once the case ends. Therefore, you'll need to make preparations if you choose this course of action.
Convert to a Chapter 7 Bankruptcy
The second option is to convert your case to a chapter 7 bankruptcy. You can do this at anytime. However, this is only an option if you have not already received a chapter 7 bankruptcy discharge in the previous 8 years.
The primary benefit of this option is that all debts that can be discharged through a chapter 7 bankruptcy will be. For instance, your home loan will be wiped out. However, the creditor may still repossess the house. However, debts that aren't dischargeable at all through bankruptcy, such as student loans, will still be owed.
One drawback to this option is you may be required to pass the chapter 7 bankruptcy means test. This is a test that determines if you have sufficient money and assets to repay some your debts through a chapter 13 bankruptcy. If you don't pass, then you will not be able to convert your case.
It may seem redundant to have to undergo this test when you're attempting to convert your chapter 13 bankruptcy because of your inability to pay. Some courts agree. For example, a Massachusetts bankruptcy judge ruled that a petitioner doesn't have to submit to a means test when converting his or her case. Whether or not you'll have to will depend on where you're located. If your financial situation has changed significantly, though, then passing this test may not be a problem.
No matter which option you choose, it's best to consult with a chapter 13 bankruptcy attorney. The attorney can help you navigate the oft times complex proceedings to obtain the outcome your desire.