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Filing for a chapter 13 bankruptcy allows those with a regular income to come up with a plan approved by their creditors and the legal system to pay off debt with their earnings over a specified time. This differs from a chapter 7 bankruptcy, which taps into your assets to pay off your creditors.
Sometimes, once your chapter 13 bankruptcy plan is approved and you are making progress on your debt, you might want to leave the protection of the plan early. While doing well with your finances is worth celebrating, leaving the plan early isn’t always the best idea. Leaving early means you may be responsible for debts again and debt collectors can start contacting you again. Before deciding if that’s a good idea, make sure you understand the difference between being under the protection plan and leaving early.
How chapter 13 bankruptcy works
You are eligible to file for chapter 13 relief if your total secured and unsecured debts total less than $2,750,000 at the time you file. You must have a regular income to file, but the income can come from being self-employed or operating an unincorporated business. The government also regularly adjusts those limits for inflation.
To apply, you should have filed your tax return for the previous year, and you will also need any tax returns filed during the case. And you would need to attend credit counseling within 180 days before filing for bankruptcy.
Once you file your petition and a repayment plan with a bankruptcy court, a trustee will step in to handle the case. This trustee will hold a meeting of your creditors. You will have to answer questions, under oath, that they and the trustee might pose to you. After that, the court will hold a hearing about your chapter 13 bankruptcy case.
Your plan will allow you to make these regular payments over a period ranging from three to five years. Your plan will run for three years for those whose income is below your state’s median income. In cases where the debtor’s income is higher than the state median income, the plan period will run for five years.
You will be allowed to keep the funds you require from your income to pay your reasonable living expenses. The remainder of your income, which is your disposable income, will go toward paying off your debts.
Ways to get an early discharge from bankruptcy
If by some chance you can pay off your debts before your plan ends—maybe you inherit some money or win the lottery—you might be able to pay off your debts and exit the plan before it ends. It’s important to note, though, early discharges aren’t often granted.
Entering discharge requires a court notice and hearing. Debtors must meet these criteria to be granted a discharge:
- All domestic support obligations have already been paid
- No discharge was given to the debtor in a prior bankruptcy case
- The debtor has completed an approved financial management course
Some debtors might see a drastic change in their circumstances that makes it difficult for them to make their plan payments. For instance, you might lose your job or your income could go down to the extent that you can’t keep up with your chapter 13 plan commitment.
In such cases, you could apply for a chapter 13 hardship discharge. You will not get all your debts discharged this way. Before discharging your case, unsecured creditors who have made a claim should have received at least as much as they would have under a chapter 7 bankruptcy case.
Advantages of leaving bankruptcy protection early
Leaving a chapter 13 bankruptcy plan early can be a good idea if you are granted an early discharge. Here are some advantages to leaving bankruptcy protection early.
You no longer owe some or all of your debtors
When you get an early discharge from a chapter 13 bankruptcy plan, it either means you couldn’t make the required payments due to an unexpected hardship or you were able to pay off your debts in full. Either way, the discharge allows you to be freed of your debts.
When you pay off your debts in full, you are free of all debt. When you receive a hardship discharge, you are no longer responsible for nonpriority unsecured debts.
No restrictions to how you spend your money
With chapter 13 bankruptcy plans, you often have automatic draws on your paycheck. Even if you don’t, you still have regularly required payments you are legally committed to. Leaving the plan early means you can spend your money how you want. You don’t have to follow a legally-mandated plan.
Disadvantages of leaving bankruptcy protection early
Deciding to apply for an early discharge from a chapter 13 bankruptcy plan isn’t always the right decision. Weigh the pros and cons as you decide if it’s the right step for you. Here are some of the disadvantages you will face.
You have to pay your debt in full
One of the ways to leave chapter 13 bankruptcy protection early is by paying all your debts in full. While leaving early might sound good, you also get some payment relief by completing the plan. If you don’t want to have to pay your debts in full, leaving early might not be to your advantage.
It enables debt collection efforts
Once you file a chapter 13 case, you will have protection from debtors’ collection efforts. There will be a stay against such efforts. Collectors will not be able to initiate a case, continue to pursue one, garnish your wages, or call you about the debt.
Once you leave the plan, you no longer have this protection. Debt collectors can resume debt collection if you still owe them.
You leave behind all other protection benefits
If anyone has co-signed a loan with you, a creditor may also not pursue collection efforts with them (unless the bankruptcy court rules to the contrary). Filing for a chapter 13 case also stops foreclosure efforts on your home.
Given that you will be losing all these protections by leaving chapter 13 protection due to a hardship, it may be in your best interests to only do so as an absolute last resort.
If you are unable to manage your financial obligations but you still have a regular income, filing for chapter 13 bankruptcy might be the right option. Chapter 13 bankruptcy is a way to help you keep your house from foreclosure while helping with other debts.
Sometimes you can apply for an early discharge for your chapter 13 bankruptcy plan. If you are considering these options, consider both the pros and cons of doing so. Remember that applying for early discharge doesn’t mean you will automatically be approved for one.