What Happens If Your Chapter 13 Bankruptcy Fails?

Posted on: 11 December 2014

If you've been having trouble catching up on bills and can see no way out, you may be considering bankruptcy. If your income or debts are too high for a traditional Chapter 7 discharge, you may still be eligible for a Chapter 13 repayment plan. However, these plans have a relatively low success rate -- only about 33 percent of debtors who enter a Chapter 13 plan complete it successfully. What happens if you enter a Chapter 13 repayment plan and are unable to adhere to it? Read on to learn more about the consequences of a failed Chapter 13 bankruptcy.

What is a Chapter 13 bankruptcy?

Unlike the traditional Chapter 7 bankruptcy, which results in a total discharge of all eligible debts, a Chapter 13 bankruptcy requires you to work with the bankruptcy trustee to create a repayment plan and budget. Each month, you'll turn over a certain amount of your net income to the bankruptcy trustee, who will pay your creditors in order of priority. You may be required by the trustee to cut out certain small luxuries (such as cable or a cell phone) in order to adhere to your repayment plan. A Chapter 13 repayment plan can last anywhere from three to five years, depending on the total amount of debt and the monthly income provided to the bankruptcy trustee.

What happens when a Chapter 13 fails?

Although about a third of Chapter 13 debtors are able to complete their five-year repayment plan and emerge solvent, this means that two-thirds of Chapter 13s fail. However, this doesn't mean your efforts were for naught. Generally, Chapter 13s fail for one of two reasons -- either the amount of debt was too high for the plan, or the amount of gross monthly income decreases so that the previous repayment amount is now unaffordable.

  • If your debts were too high: Often, by the time it is clear that even a five-year repayment plan is insufficient to eliminate your outstanding debt, you've paid enough on this debt that it is now eligible for a Chapter 7 discharge. In this case, your Chapter 13 filing can be converted to a Chapter 7 filing fairly easily. Luckily, this conversion should not affect your credit score, which was already somewhat lowered from the Chapter 13 filing.
  • If your monthly income changes: Often, even individuals with debts over the Chapter 7 limit may find themselves eligible for a Chapter 7 discharge if their income drops for a significant period of time. Again, your Chapter 13 will be converted to a Chapter 7 and your remaining debts discharged.

For more information about Chapter 13 bankruptcy, contact Patton Hoversten & Berg PA.