Getting Out of Your Chapter 13 Case If Needed
It’s good to know in advance that you can usually get out of an ongoing Chapter 13 bankruptcy case by simply asking to do so.
My last two blog posts were about getting out of a Chapter 7 “straight bankruptcy” case if your circumstances change. You can “convert” your case into a Chapter 13 “adjustment of debts” one virtually always. But you can “dismiss” a Chapter 7 case—leave bankruptcy behind altogether—only if you have a very good reason.
Unlike Chapter 7, if you file a Chapter 13 case you can “dismiss” it—get out of it completely—much more freely. Why the difference?
A Clear Right to Dismiss
You can dismiss a Chapter 13 case more easily because the Bankruptcy Code directly says so. It doesn’t say that about Chapter 7 cases.
And the Code says so quite strongly:
“On request of the debtor at any time . . . the [bankruptcy] court shall dismiss a case under this chapter .” (Section 1307(b).)
Notice that you, the debtor, can ask for a dismissal “at any time.” This means that you can make the request throughout the life of a Chapter 13 case. You can dismiss it early, before your payment plan is approved by the court. Or you can dismiss it years into your case, whenever it stops serving it purpose.
Notice also that the language of the statute does not give the court any discretion about whether or not to dismiss the case. It says that “the court shall” dismiss the case whenever the debtor makes a request. The statute does not say the court “may” or “might” dismiss, but rather that it “shall” do so.
Why Would You Want to Dismiss Your Case?
A Chapter 13 case lasts a relatively long time compared to a Chapter 7 case. A lot can change during the 3 to 5 years that a case usually takes.
For example, the main reason to file a Chapter 13 case is often to be able to keep a home. It provides many advantages for doing so. If the debtors’ circumstances significantly change so that keeping the home is no longer important, it may make sense to dismiss the case. If the main breadwinner gets a job in a different region, if the couple get divorced, if their kids move away, if the homeowner gets an unexpected opportunity for much less expensive housing—these could all make Chapter 13 no longer the best option.
There are countless reasons why staying in a Chapter 13 case may at some point no longer make sense. As in the above example the reason for filing Chapter 13 may no longer apply. Or the original purpose may become no longer be feasible, such as if there’s an unexpected reduction in income.
Practically speaking, simply dismissing the case is often not as good as “converting” into a Chapter 7 case. That’s because usually the debtor has debts that still have to be dealt with, mostly by “discharging” them—writing them off permanently. Chapter 13 only does that at its successful completion, so if it’s dismissed before then the debts are still owed. I’ll address converting to Chapter 7 in an upcoming blog post.
Is the Right to Dismissal Absolute?
In spite of the very clear language in the statute discussed above, the right to dismiss a Chapter 13 case may not be absolute. Under certain unusual circumstances, in bankruptcy courts in certain parts of the country, you may not be able to dismiss by simply asking to do so.
There has been debate among bankruptcy judges about whether they must always dismiss a Chapter 13 case when requested by a debtor. A number of judges have decided that in situations of serious debtor abuse or fraud, there are other statutes that can trump the one cited above (Section 1307(b)) that sounds so absolute. So in limited situations a judge might prevent a Chapter 13 case from being dismissed.
But still, in the vast majority of situations if you would ask for your Chapter 13 case to be dismissed, it would quickly happen.