Chapter 13 Bankruptcy Failures
Filing for bankruptcy can be one of the smartest decisions you ever make and bring massive relief when you’re dealing with financial challenges. But it only feels that way if your case is successful.
And when it comes to filing for Chapter 13 bankruptcy, success is easier said than done.
The majority of Chapter 13 cases fail. They meet the criteria after the bankruptcy means test and they are approved by the bankruptcy court to move forward, but the debtor never gets the discharge they so desperately need.
In most cases, failure is due to one of several reasons:
- Life circ*mstances
- Not having the guidance of an experienced bankruptcy attorney
- Over-ambition
- Too stringent a calculation for payments
- Need for bankruptcy goes away
Let’s take a look at a few of these in detail.
Life Circ*mstances
Chapter 13 bankruptcy requires a length commitment from the debtor. Repayment plans are three to five years and while that might not seem like a long time if you’ve been dealing with financial struggles for decades, a lot can change in that time.
It is possible to get a Chapter 13 case switched to a Chapter 7 if your income is drastically reduced during the course of your repayment plan, so it’s not as if your bankruptcy is a total failure, but you need to take action and seek advice from a bankruptcy attorney if and when there is a change.
For more information about converting a Chapter 13 bankruptcy to Chapter 7, check out this information from NOLO.com.
Filing for Bankruptcy without an Attorney
One of the biggest mistakes you can make when you decide to file for bankruptcy is going it alone. You have the legal right to file without an attorney, but there’s a high probability your case will not succeed.
Over-Ambition
Another common mistake with Chapter 13 is filing this chapter to protect your house when your ownership of that house is already doomed. If you’re living in a home that is just too expensive and you cannot now nor will you be able to afford the mortgage payments in the near future, there’s no sense trying to hold onto that house, even if you have the option of doing so. The same goes for other assets you aren’t able to afford. Bankruptcy is about getting clear and making smart financial decisions, so don’t put yourself at a disadvantage right out of the gate.
Be realistic with yourself about what the payments would look like. To get a sense of what your Chapter 13 plan would cost, use the calculator below to estimate your monthly payment.
Stringent Calculation of Payments
Under the Bankruptcy Code, all of your disposable income goes to repaying creditors for up to five years. And when it comes to Chapter 13 bankruptcy, all means all. Every last penny based on a formula created by lawmakers.
What are the odds this one-size-fits-all formula is going to fit all?
Not only does it make it so you have absolutely nothing to save leftover after paying creditors, but you also have nothing to put toward unexpected expenses. Any smart financial counselor would encourage you to live below your means and focus on the future, but Chapter 13 debtors are expected to spend every dime they make.
This is a formula for failure.
Bankruptcy Need Evaporates
The final reason Chapter 13 cases don’t succeed? They don’t need to succeed. So it’s not all bad news here.
Some people begin the Chapter 13 process only to discover they don’t need it in the long run. They enjoyed the protection of the automatic stay while they re-negotiated a debt or dealt with a specific situation, but ultimately didn’t need to go through the entire process.
In some cases, what initially began as a Chapter 13 becomes a Chapter 7 before too much progress is made on the case. Bankruptcy is still needed, but the long-term commitment never becomes an issue.
If you think Chapter 13 might be right for you and you want to avoid the problems that so often cause cases to fail, we can help. Contact the Bankruptcy Law Office of Robert M. Geller at 813-254-5696 or schedule an appointment to discuss your situation.
FAQs
In summary, a Chapter 13 bankruptcy can fail for lots of reasons. These could be inadequate repayment plans, failure to make plan payments, changes in your financial circ*mstances, failure to do those required courses, filing too soon after previous bankruptcy, and filing without legal representation.
Why would Chapter 13 be denied? ›
Chapter 13 Can Be Denied if the Bankruptcy Process is Not Followed. Under relevant bankruptcy law, a debtor should enroll and successfully finish a credit counseling course from an institution approved by the United States Trustee's Office. Otherwise, it is likely the bankruptcy case will not push through.
What percentage of Chapter 13 bankruptcies are successful? ›
Chapter 13 should never be filed without a lawyer. Chapter 13 cases filed with an attorney already have only a 33% success rate; that number drops to a 2.3 % success rate without a lawyer. In fact, many bankruptcy trustees will tell you they have never seen a successful Chapter 13 case where a debtor was unrepresented.
What is the downside of Chapter 13? ›
A Chapter 13 bankruptcy typically stays on your credit reports for seven years from the date you filed the petition. That can lower your credit score by around 130 to 200 points, but the effects on your credit diminish over time.
Why would Chapter 13 be dismissed? ›
Why Would a Chapter 13 Be Dismissed? Most Chapter 13 cases are dismissed because the debtor fails to make monthly payments. In Chapter 13 bankruptcy, the debtor must pay back some or all of the debts through a repayment plan. If the debtor stops making the plan payments, the court will dismiss the case.
Why do people fail Chapter 13? ›
You can keep those in a Chapter 7 or in a Chapter 13. Despite these benefits though, there are some instances where a Chapter 13 bankruptcy can fail. The number one reason that bankruptcies fail for Chapter 13 is because people don't make their plan payments. Your plan payment has a job.
What would disqualify you from filing Chapter 13? ›
An individual cannot file under chapter 13 or any other chapter if, during the preceding 180 days, a prior bankruptcy petition was dismissed due to the debtor's willful failure to appear before the court or comply with orders of the court or was voluntarily dismissed after creditors sought relief from the bankruptcy ...
How much debt is too much for Chapter 13? ›
There is no minimum amount of debt you must be in to file for Chapter 13 bankruptcy. However, your combined secured and unsecured debt cannot exceed $2,750,000 on your filing date, per the United States Courts. Chapter 13 allows you to create a plan to repay your debt given that you make a consistent income.
What is the average Chapter 13 monthly payment? ›
A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.
What can I not do during Chapter 13? ›
Also do not not incur debt, use credit, credit cards, or enter into leases while in Chapter 13 without Bankruptcy Court approval, except in the case of an emergency for the protection and preservation of life, health or property. Contact your attorney if you need to sell property or incur debt.
Unlike chapter 7, creditors do not have standing to object to the discharge of a chapter 12 or chapter 13 debtor. Creditors can object to confirmation of the repayment plan, but cannot object to the discharge if the debtor has completed making plan payments.
Will Chapter 13 take all my money? ›
In a Chapter 13 bankruptcy, you typically get to keep your personal property. This is because Chapter 13 is designed to reorganize your debts and allow you to repay them over a three to five-year period. This is in contrast to liquidating your assets to pay off creditors like what happens in Chapter 7 bankruptcy.
What happens to your bank account when you file Chapter 13? ›
Your bank account will generally remain unaffected by the filing, allowing you to manage your daily finances as usual. Credit Unions, under Michigan Law, do have a one-time right to set-off whatever funds are on deposit in your account on the date of the filing.
What happens if you fail Chapter 13? ›
Skipping a Chapter 13 plan payment can negatively impact your Chapter 13 case. If you miss a payment under the plan, the court can decide to dismiss your case or change your bankruptcy case to Chapter 7. Under a Chapter 7 bankruptcy, the court can liquidate your nonexempt assets to pay your outstanding debts.
How to get out of Chapter 13 early? ›
It's designed so you'll pay the amount you can afford. Therefore, the court will only let you complete your Chapter 13 bankruptcy early under two conditions: You can pay everything you owe in full other than long-term obligations like mortgages, or you can prove a financial hardship.
What happens if I lose my job during Chapter 13? ›
If your income drops because of a job loss, your Chapter 13 bankruptcy options will include asking for a Chapter 13 plan modification or a hardship discharge. Life circ*mstances can change during a Chapter 13 plan, and it isn't uncommon for a filer's income to drop.
What can't you do in Chapter 13? ›
Also do not not incur debt, use credit, credit cards, or enter into leases while in Chapter 13 without Bankruptcy Court approval, except in the case of an emergency for the protection and preservation of life, health or property. Contact your attorney if you need to sell property or incur debt.
Does Chapter 13 trustee monitor income? ›
Trustees do not monitor your income during the course of your repayment. However, a trustee possesses what Ginter terms “broad powers” and responsibilities. They include: Determining if you qualify for Chapter 13 bankruptcy.
Can you negotiate with creditors after Chapter 13 dismissal? ›
Yes, you can negotiate with creditors after a Chapter 13 dismissal. Once the case is dismissed, creditors can resume collection efforts, and you may be able to negotiate payment plans or settlements directly with them.
Chapter 13 Bankruptcy Failures