Chapter 7 and Chapter 13 bankruptcies are two common types of bankruptcies filed by consumers. Chapter 7 bankruptcy discharges all qualifying debts, while Chapter 13 bankruptcy consolidates debts that are paid off through a three to five-year payment plan.
Chapter 13 bankruptcy is often an attractive option if you own a home that you want to keep. Filing Chapter 7 could require you to sell your home to pay your debts.
You must have income and show that you can make monthly payments to qualify for Chapter 13 bankruptcy. You may be able to make your payments as you start your payment plan, but unexpected events, such as a job loss or illness, could leave you unable to keep up with the payments before the end of the payment term. What then?
What not to do
Treat your payment plan as you would any other debt. The worst thing you can do is nothing. Ignoring payments and getting behind could result in a discharge of your Chapter 13 bankruptcy.
Chapter 13 bankruptcy is managed by a bankruptcy trustee. The trustee must report any missed or incomplete payments to the bankruptcy court. If the bankruptcy court discharges your Chapter 13 bankruptcy, you no longer have bankruptcy protections and are subject to creditor collection efforts and harassment.
Tell your bankruptcy trustee if you cannot make a payment or cannot pay the full amount. The trustee will tell the bankruptcy court who will review your situation.
Depending on the circumstances, the bankruptcy court could give you additional time to catch up on payments or modify your payment plan to lower your payment amount. If your situation is extremely serious and you can show hardship, the bankruptcy court could convert your bankruptcy to Chapter 7 and discharge your debts.
Proving hardship
Showing hardship typically requires demonstrating a change in your financial situation that is not likely to change. An example is an illness that prevents you from ever going back to work and earning an income. It can be challenging to obtain a hardship discharge.
When it becomes hard to make your payments, act quickly and learn your options. This can prevent your financial situation from becoming worse.