Should You Exit Chapter 13 Bankruptcy Earlier?
If you are feeling overwhelmed by your debt, you may be looking for a way out of your predicament. Most people tend to find themselves in this kind of situation when life throws curveballs at them.
For example, you could lose your job, have a major accident, or lose control of your financial situation in some other way. Filing for bankruptcy would offer you a way out of your predicament in a way that also provides you with legal protection against your creditors.
Filing for a Chapter 13 bankruptcy allows you to develop a plan with the approval of your creditors and the legal system to pay off your debt with your income over a number of years. This is different from a Chapter 7 bankruptcy, which draws on your assets to pay off your creditors.
It could be that after your Chapter 13 bankruptcy plan has been approved and you’ve started your debt, you may want to get out of Chapter 13 sooner than you expected. Before deciding if this is a good course of action, let’s take a look at what kind of protection a Chapter 13 bankruptcy actually offers you.
How Does a Chapter 13 Bankruptcy Plan Work?
You can file for Chapter 13 bankruptcy protection if your unsecured debts (those that are unsecured by no collateral such as a car or house) total less than $ 419,275 and your total secured debts (those that are unsecured. have assets supporting them) are less than $ 1,257,850. The government also regularly adjusts these limits based on inflation.
You should also have filed your income tax returns for the previous four years. And you would have to attend credit counseling before you file for bankruptcy.
Once you have filed your petition, along with 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 and you will have to answer, under oath, any questions they and the trustee may ask you. After that, the court will hold a hearing on your Chapter 13 bankruptcy case.
This type of bankruptcy is also called the “employee’s plan” since it applies to those who receive monthly income to develop a plan to get out of debt. Your plan will allow you to make these regular payments over a period of three to five years.
If your income is less than the median income for your state, your plan will last for three years. In cases where the debtor’s income is greater than the state’s median income, the plan period will be five years. You will be allowed to keep the funds you need from your income to pay for your reasonable living expenses. The rest of your income, which is your disposable income, will be used to pay off your debts.
Anticipated discharge of Chapter 13 protection
If by any chance you are able to pay off your debts before your plan ends (you might inherit the money, for example, or have won the lottery), you will be able to pay off your debts and exit the plan. before it ends.
But some debtors could see a drastic change in their circumstances, making it difficult for them to make payments from their plan. For example, you could lose your job, or your income could drop to the point that you can no longer meet your Chapter 13 plan commitment.
In such cases, you can apply for a Chapter 13 hardship relief. You will not be discharged of all your debts this way. Before discharging your case, unsecured creditors who made a claim should have received at least as much as they would have received in a Chapter 7 bankruptcy case.
Leaving Chapter 13 Protection Allows Debt Collection Efforts
Once you file a Chapter 13 case, you will be protected from debtor collection efforts. There will be a suspension against such efforts and collectors will not be able to initiate or continue a business, garnish your salary, or call you about the debt.
And in the event that someone has co-signed a loan with you, a creditor may also not pursue collection efforts with them (unless the bankruptcy court decides otherwise). Filing a Chapter 13 case also stops foreclosure efforts on your home.
Since you will lose all of these protections by exiting Chapter 13 protection due to some difficulty, it may be in your best interest to do so only as an absolute last resort.