Leaving Chapter 13 bankruptcy protection early

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Dear Bankruptcy Adviser,
After filing a chapter 13 and missing no payments I decided to dismiss the case and try to work with my creditors myself. However, with the debt I will be paying the original amount and all the interest. Should I obtain an attorney for settlements to these creditors? When I contacted some of the creditors they are not willing to accept 40 percent -50 percent. Some balances are absurd.
— Jo

Dear Jo,
You may have made a really bad decision.

Chapter 13 is far preferable to the issues you have created for yourself. Unless you have a lump sum of money available to pay all the debts at once, you should contact an attorney immediately who can handle your debt negotiation and possibly refile another Chapter 13. Collection agencies might already be preparing to sue you. While an attorney can’t stop that process, he or she may be able to help you repair your situation before it worsens.

Many people find themselves in your situation — usually just not of their own free will. Nationally, around 20 percent to 25 percent of Chapter 13 filers actually complete the repayment plan. One reason for the low completion rate is that some filers use an asset to pay the balances. Homeowners sometimes find mortgage lenders willing to refinance their property and pay off their debts, taking them out of the Chapter 13. But many simply stop making their plan payment because it is too burdensome. Their debt is sold to collection agencies who plan to sue them, get a judgment and garnish their wages — on an amount FAR GREATER than what it would have been under Chapter 13.

This is the piece of the puzzle that you’re missing, Jo — the amount of debt you have is increasing and, at the time a collection agency is involved, it has gotten bigger. Here’s an example to help this make sense for most people filing Chapter 13:

At the time you file, you have a certain amount of Debt ($D), Assets you’re trying to protect ($A), and the amount of that asset you’re allowed to Protect under the bankruptcy laws ($P). Chapter 13 basically says, you can keep $P. But you’re going to have to pay $(A minus P) to your creditors. In return for this, you won’t have to pay $D after you complete your plan. After all, that’s why you filed bankruptcy in the first place.

The question is, what’s happening to the debt during the three to five years that a Chapter 13 payment plan takes? As long as you are protected by the bankruptcy laws, your original debt does not increase. But as soon as you opt out of the program, voluntarily or not, that debt still exists and continues to accrue at interest rates that can be as high as 30 percent.

Once you lose the bankruptcy protection, the creditor can sue you or your debt may be bought by a collection agency that will sue you. Rest assured that you are a prime target. You have debt accruing at an incredible rate, you may have an asset you’re trying to protect, and while collection agencies are often willing to settle for 60 percent to 80 percent of the overall debt, the original debt can double, triple or more. Thirty-percent interest makes everything happen FAST.

Somewhere along the line, Jo, you got some bad information. The new laws have made it more difficult for people to file bankruptcies after having a previous case dismissed in the prior 12 months. People considering dismissing their bankruptcies need to speak to their attorneys before they stop making their bankruptcy payments. Some people might have to wait a year before filing again, which could be too late if you have an emergency situation such as a foreclosure or wage garnishment. Please see an attorney.

Justin Harelik is a practicing attorney in Los Angeles. To ask a question of the Bankruptcy Adviser go to the “Ask the Experts” page, and select “bankruptcy” as the topic.