The Pitfalls of Ending Chapter 13 Protection Early

As the last few months showed, debt can become overwhelming and there may be sudden financial reverses. A Chapter 13 bankruptcy is one option that allows you to pay off debt with your earnings over a few years under a court approved plan. Leaving this protection early can have negative consequences.

Chapter 13

Debtors may file a Chapter 13 bankruptcy if their unsecured debt is less than $419,275 and their secured debt is below $1,257,850, adjusted for inflation. Unsecured debt is not backed with collateral such as a vehicle or house while property backs a secured debt.

A Chapter 13 bankruptcy is also known as a wage earner’s plan. It can be used by debtors who receive a monthly income that can pay off their debt over three to five years. It differs from Chapter 7 because it does not take the debtor’s assets.

Debtors must submit their tax returns for the last four years and attend credit counseling before filing. A trustee becomes involved after a petition and a repayment plan are filed with the bankruptcy court.

The trustee will convene a meeting of creditors where the debtor will answer their questions under oath. The court then holds a hearing on the bankruptcy case.

The plan lasts for three years if the debtor’s income is below Kentucky’s median income and five years if their income exceeds the state’s median income. Debtors can keep income for paying reasonable living expenses. The remaining income is disposable income used for paying debts.

Early Discharge

You may end this plan if you can pay off your debts early if you received a large infusion of cash such as an inheritance. Or you may leave the plan before it ends if you have trouble paying off your debts or suffer a financial downturn, such as a sudden job loss.

If this occurs, debtors may seek a chapter 13 hardship discharge which does not discharge any debt, however. Before discharge, unsecured creditors who made a claim should receive at least as much as they would have under a chapter 7 filing.

Hardship discharge removes chapter 13’s protections and stays against home foreclosure and collection efforts like beginning or pursuing a collection case, garnishing wages, or calling the debtor.

Chapter 13 also prevents creditors from pursuing collection efforts against anyone who co-signed a loan with the filer unless a bankruptcy court grants permission.

Attorneys can provide guidance on filing and continuing with this plan. They can also provide other bankruptcy options.

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