Filing for bankruptcy can be a difficult and stressful process, but it doesn’t have to be. With a little help from the legal system and your creditors, you can develop a plan to pay off your debt over time. This is called a chapter 13 bankruptcy, and it’s different from a chapter 7 bankruptcy, which uses your assets to pay off your creditors.
Leaving your chapter 13 bankruptcy protection plan early may seem like a good idea, but there are some things you should consider before making that decision. Once you leave the protection of the plan, you may be responsible for debts again and debt collectors can start contacting you. Make sure you understand the difference between being under the protection plan and leaving early before making a decision.
How Does Chapter 13 Bankruptcy Work?
To file for Chapter 13 bankruptcy, your total secured and unsecured debts must be less than $2.75 million at the time of filing. This type of bankruptcy is available to those who have a regular income, which can come from self-employment or operating an unincorporated business. The government adjusts the debt limits for inflation on a regular basis.
In order to apply for this, you will need to have filed your tax return from the previous year. In addition, any tax returns filed during the case will also be required. You’ll need to go through credit counseling for at least 180 days before you can file for bankruptcy.
After you have filed your petition for bankruptcy and created a repayment plan, a trustee will be assigned to your case. This trustee will hold a meeting with your creditors, during which you will be required to answer questions truthfully and under oath. After the meeting, the court will hold a hearing to determine whether or not to approve your chapter 13 bankruptcy case.
With this plan, you can make regular payments over a period of three to five years. For those whose income is below the state median income, the plan will last for three years. For those with an income above the state median income, the plan will last for five years.
As long as your living expenses are reasonable, the amount of income needed to cover them is yours to keep. The rest of your income (disposable income) will go towards repaying your debts.
How To Get A Bankruptcy Discharge Early
It’s important to note that early discharges from debt repayment plans aren’t often granted. However, there is a chance you may be able to pay off your debts and exit the plan before it ends, either through inheritance or winning the lottery.
In order to be discharged from your debts, you must first go through a court notice and hearing process. Some of the requirements for discharge include:
- All domestic support obligations have already been paid
- No discharge was given to the debtor in a prior bankruptcy case
- The debtor has completed an approved financial management course
Debtors who experience a sudden change in their circumstances may find it difficult to make their plan payments. For example, you may lose your job or your income could drop to the point where you can’t keep up with your chapter 13 plan commitment.
Applying for a chapter 13 hardship discharge may be an option for you in this case, though it is important to understand that not all debts will be discharged this way. Under a chapter 7 bankruptcy case, unsecured creditors who have made a claim are typically entitled to receive at least as much as they would through this process.
The Pros Of Leaving Bankruptcy Protection Early
There are some advantages to early discharge from a chapter 13 bankruptcy plan. Here are some reasons why it may be a good idea to leave bankruptcy protection early.
You Stop Owing Some Or All Of Your Creditors
After you complete a chapter 13 bankruptcy plan, you may be eligible for an early discharge. This means that you are no longer responsible for repaying your debts. An early discharge may be granted due to unforeseen circumstances or because you have paid off your debts in full. Either way, the discharge allows you to be relieved of your financial obligations.
Once you have paid off all your debts, you are free from any financial obligations. A hardship discharge means that you are no longer responsible for repaying nonpriority unsecured debts.
Your Money Is Yours To Spend However You Like
Without a chapter 13 bankruptcy plan, you would have to make regular payments toward your debt. However, leaving the plan early means that you are no longer legally obligated to do so. This gives you the freedom to spend your money as you please.
The Cons Of Leaving Bankruptcy Protection Early
Deciding whether or not to apply for an early discharge from a chapter 13 bankruptcy plan can be a difficult decision. There are pros and cons to consider before making a decision. The following are some of the disadvantages you may face when applying for an early discharge.
You Have To Fully Pay Your Debt
There are a few ways to leave chapter 13 bankruptcy protection early, but paying all your debts in full is the most common method. While leaving early might sound good, you also get some payment relief by completing the plan. So, it really depends on your personal situation as to whether or not leaving early is to your advantage.
Debt Collectors Can Pursue Collection Again
As soon as you file for chapter 13 bankruptcy, you will be protected from your creditors’ collection efforts. There will be a stay against such efforts, which means that creditors will not be able to initiate or continue a case against you, garnish your wages, or call you about the debt.
Debt collectors may resume debt collection efforts after you leave a repayment plan, as long as you still owe them money. This protection is no longer in place when you exit the plan.
You Lose All Protection Benefits
Bankruptcy can help protect you and your co-signers from creditors (unless the court rules to the contrary). Chapter 13 bankruptcy also stops foreclosure proceedings on your home, giving you time to catch up on missed payments.
It may not be in your best interests to leave chapter 13 protection due to a hardship. You could lose many important protections by doing so. Only do this as an absolute last resort.
Bottom Line
Filing for bankruptcy can be a difficult decision to make, but it may be the right choice for you depending on your financial situation. Chapter 13 bankruptcy allows you to keep your house from foreclosure while also helping with other debts. This type of bankruptcy can be beneficial for those who have a regular income but are struggling to manage their financial obligations.
Are you considering applying for an early discharge from your chapter 13 bankruptcy plan? There are both pros and cons to doing so, so it’s important to weigh them carefully before making a decision. Remember that just because you apply for an early discharge doesn’t mean you will automatically be approved.
