It’s possible to find yourself in a situation where you can’t complete your Chapter 13 bankruptcy case and are wondering whether debt settlement is a good alternative. While bankruptcy may be a good option for some folks, others face hardship within a bankruptcy that may not allow them to continue.
And this isn’t much of a surprise as there are multiple reasons for this, one of which is due to recent unemployment. Other noteworthy issues include high payments, financial hardship, or an illness. Unfortunately, there are grave consequences for defaulting on a Chapter 13 plan. In this article, we’ll discuss the consequences, alternatives, and how to get a Chapter 13 dismissal refund.
1. How Does a Chapter 13 Dismissal Work
A Chapter 13 bankruptcy dismissal means that you will not continue with your bankruptcy until discharge.
While Chapter 13 bankruptcy dismissal may not be ideal, there are instances where you would receive a refund.
Any money remaining undistributed to creditors can be held by a Chapter 13 trustee. And once a Chapter 13 case has been dismissed, the trustee will then return to the debtor. However, a Chapter 13 bankruptcy trustee must first file for a detailed accounting with the bankruptcy court before refunding the debtor. By the law, the bankruptcy trustee is allowed to first deduct administrative fees before returning the remaining amount to you. However, you could wait for several weeks and months before you get a refund after dismissal.
Also, a bankruptcy attorney may make claims on those funds for unpaid professional fees. And in some instances, the refund may be subjected to an IRS levy or a garnishment order. The reason for this is that once dismissal is issued, the bankruptcy automatic stay ceases to be in effect. In the absence of a bankruptcy stay, creditors can take legal steps to collect what they’re owed.
2. Is Debt Settlement a Good Option?
After dismissal, you may be comparing Chapter 13 bankruptcy vs debt settlement. This is a common alternative to Chapter 13 bankruptcy as it may be cheaper and require less time.
That said, there are multiple alternatives for you to opt for after getting a Chapter 13 bankruptcy dismissal. You can either re-file for bankruptcy under Chapter 7 or Chapter 13 again or opt for another debt relief option. However, depending on the reason for getting your petition dismissed, the automatic stay may not go into effect unless you file for another motion in court. Also, there is sometimes a designated penalty period before the automatic stay comes into effect. Within this timeframe, creditors may take steps to collect what you owe them.
A dismissal of a Chapter 13 case with prejudice may lead to a mandatory waiting period before re-filing bankruptcy.
Irrespective of your circumstance, you can use our debt relief options calculator for a comparison of options you have after getting your Chapter 13 bankruptcy case dismissed. The most prominent options are debt settlement and converting to Chapter 7 bankruptcy before the case is dismissed.
Using the Debt Relief Options calculator will help you know your chances for qualifying for a Chapter 7 bankruptcy discharge. We elucidated some helpful information below the calculator for educational purposes.
Converting from Chapter 13 to Chapter 7 bankruptcy
You might be given the option of converting to Chapter 7 before your Chapter 13 bankruptcy case is dismissed. Converting to Chapter 7 offers you an opportunity to get a quick debt dismissal. However, there are risks involved with this conversion.
One such risk is that assets with equity are at risk of being sold by the Chapter 7 bankruptcy trustee, except there’s a bankruptcy exemption that protects the debtor’s equity. In certain instances, losing assets might be worth it if you’ll get the opportunity to get rid of your debt quickly. However, you should carefully analyze your potential asset loss before making up your mind about Chapter 7 bankruptcy. You can read our Chapter 7 overview for more detailed knowledge about the Chapter 7 bankruptcy process.
3. What are the Common Reasons for a Chapter 13 Dismissal?
Generally, a Chapter 13 bankruptcy plan is a 60-month repayment plan commitment. Some individuals are issued a 36-month repayment plan, but that’s in rare instances. In either case, three to five years is too much a time for most people to process a bankruptcy discharge. Soo many things can happen within such long periods. Some common reasons for a Chapter 13 case to be dismissed include the following:
- Voluntary dismissal: A chapter 13 bankruptcy is generally deemed as a voluntary repayment plan. A debtor (The individual filing for the bankruptcy relief) is at liberty to quit the process anytime they deem fit.
- Missed Chapter 13 payments: In an instance where you default on your Chapter 13 payments, then the course is mandated to dismiss your case. However, a good number of bankruptcy attorneys calculate Chapter 13 plans with some room for three months of missed payments. This is called a 3-month deferral, and the bankruptcy judge carefully examines the reason for such requests before granting or denying them.
- Failure to be present at hearings: In an instance where you’re absent from the 341 First Meeting of Creditors hearing or any other mandated hearing.
- Refusal to begin or complete all bankruptcy courses: it’s compulsory for you to complete two bankruptcy courses before you can get a bankruptcy discharge. The courses are Debtor Education Course and Credit Counseling Course.
- Meeting deadlines: the bankruptcy court stipulates a number of deadlines for bankruptcy activities. Not meeting any of these deadlines may result in a case dismissal.
4. What is the Consequence of a Chapter 13 Dismissal?
When you get a case dismissal in Chapter 13 bankruptcy, your debts are neither forgiven nor discharged. In other words, your debts remain the same. Your creditor will enter the figures for any payments they’ve gotten from the trustee, and they can take any action as permitted by law to collect their money. Some collection efforts they might take include calling you, foreclosures, repossessions, wage garnishments, and debt-collection lawsuits.
You are considering your options after Chapter 13 bankruptcy dismissal. While debt settlement may be a good alternative, you should also consider the pros and cons of debt settlement before diving in. Hopefully this article can help you consider debt settlement and alternatives as options after Chapter 13 dismissal.