What happens when I can no longer afford my Chapter 13 case?

The national success rate for Chapter 13 cases is approximately 33%. It has also been reported that if a bankruptcy is filed, Chapter 13 is the better way as it helps all parties. The debtors are at least paying something on their debt. Creditors are happy to get at least some of the money owed to them. And in the grand scheme of things, commerce continues to work. However, many times, those debtors who go the route of Chapter 13 experience a change in circumstance that was not expected. It could be an unexpected job loss, a downsizing causing a reduction in income, an illness or an accident that takes them out of work. The question that comes up when such situations occur is what happens to the case?

Generally speaking, a Chapter 13 case will not get dismissed when a debtor fails to pay his plan payment for one or even two months. However, when plan payment arrearage reaches three or more months, the Chapter 13 Trustee will file a Motion to Dismiss for Failure to Pay. So, early on, the debtors do have some time to find a new job, recover from the illness or accident and then continue with the case. This, unfortunately, is the exception rather than the rule. Even with strong efforts on the part of the debtor to get back on track, he might not find that job, the illness may not get better and recovery from the accident could take longer than anticipated.

Chapter 13 debtors who find themselves in this predicament do have the option to convert their Chapter 13 into a Chapter 7. Conversion, unfortunately, does not come without some problems of its own. The good news is all the unsecured debt is discharged in a Chapter 7 and would provide some financial relief. The bad news is, if the debtor had secured debt such as a car or mortgage arrearage, the debtors will have to face those issues. With regard to the mortgage arrearage, the debtors can attempt to work with the mortgage company. The auto creditor may also be willing to work with the debtor. The bottom line is if the debtor does nothing and the case is dismissed, everything goes back to square one and creditors can once again attempt collection of debt just as they did before the bankruptcy case was filed.