When people file for Chapter 7 bankruptcy, there are usually on a few of ways to get out of it. Discharge, conversion to a Chapter 13, or dismissal are typically the only few options available, and some of them are not really ways to get out of the process at all anyway. Contrast this with filing for Chapter 13 bankruptcy and its more numerous options in the event that it is not possible to complete the plan. There are at least four different ways to get out of this type of bankruptcy, many of which can be considered depending on the circumstances.
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The first way to end a Chapter 13 bankruptcy without completing the three- or five-year repayment plan is called a hardship discharge. If the filer's economic situation has drastically changed, such as if they die or lose a significant portion of their income, this option may be available. A hardship discharge may be granted by the court at any time after the payment plan has been confirmed, as long as unsecured creditors have received as much as they would have gotten under a straight Chapter 7 filing. There are certain tests that must be met to quality for a hardship discharge, though. As well, this is not the preferred option from the bankruptcy court's perspective.
Instead, the bankruptcy court prefers modification of the plan if the filer experiences an economic hardship. Modification of the bankruptcy payment plan is a right that all filers have, and payments to the trustee may be decreased or eliminated altogether, depending on the situation. Typically, priority claims and secured debts must still be paid, but it can be possible to eliminate payments made to unsecured creditors. The bankruptcy code provides for modification of plans as new problems arise during the period of repayment.
The third option to get out of Chapter 13 bankruptcy is to convert it to a Chapter 7, which will attempt to liquidate nonexempt assets and discharge as many of the debts as are allowed. Filers have a right to convert to a Chapter 7 at any time, and is likely to be used if a hardship is experienced but the filer does not meet the requirements of the hardship discharge. With a conversion, unsecured debts can be eliminated. Creditors can also request that the bankruptcy be converted against the filer's will, which may happen in the case of failure to file a repayment plan or failure to make the payments.
Finally, the filer can have their bankruptcy case dismissed in order to get out of the Chapter 13. Unless the case was previously converted from a different chapter of the bankruptcy code, a person may file for dismissal whenever they want. However, it should be noted that requesting a dismissal will put all of the creditors and the debtor back in the same place they were before the case was filed to begin with. Obviously, any payments made to the plan will be credited to the debtor's accounts with the creditors, but everything else will return to the status quo before the bankruptcy.
Whether any of these four different options are available at one time or appropriate in a particular case should be evaluated by the filer, his or her attorney, and the trustee of the bankruptcy court. Some of these different methods, though, may be appropriate in some cases in order to protect the personal financial interests of borrowers and avoid further negative consequences on a person's credit. Thankfully, the bankruptcy code still does a fairly adequate job of helping borrowers get a fresh start, as the options available under Chapter 13 show.
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