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What happens in chapter 13 when finances change for the worse?

This blog has discussed many issues surrounding chapter 13 bankruptcy protection. Generally, a chapter 13 bankruptcy case involves a payment plan that people with an income can use to reorganize debt. At the conclusion of the chapter 13 bankruptcy, any outstanding unsecured debt that may remain is generally discharged.

But what happens when circumstances change during the chapter 13 bankruptcy make the monthly payments in a confirmed payment plan too steep to continue to service for the debtor? The debtor, or the debtor's bankruptcy lawyer, can seek alternatives in a chapter 13 bankruptcy after a change of circumstances. Several different outcomes can arise after financial circumstances change.

The trustee overseeing the bankruptcy case may seek to have the case dismissed. If the bankruptcy court does dismiss the case, the outstanding debts involved remain payable, and creditors are allowed to resume collection activities as the protection of the bankruptcy court is removed. However, there are other potential roads that the debtor may follow after an unforeseen change in circumstances.

One potential option is for the debtor to seek a modification of the payment plan in the bankruptcy case before it is dismissed. Modifications to a bankruptcy payment plan may involve curing arrears in the payments under the plan, or possibly reduce the payment amount in some cases. In other cases, the payment plan may be extended. Each of the modification options may depend on the individual changes in circumstances.

A debtor may also seek a hardship discharge in a chapter 13 bankruptcy in certain situations. This blog previously has discussed a chapter 13 bankruptcy hardship discharge.

An additional option involves converting the bankruptcy case. The bankruptcy petitioner can consider seeking the conversion from the bankruptcy court. The process involves having the court convert the case from chapter 13 to chapter 7 bankruptcy.

Chapter 7 is a liquidation bankruptcy. Assets that are not exempt from the bankruptcy estate are essentially sold by the trustee to pay unsecured creditors. A Cincinnati bankruptcy attorney can explain to Ohio residents how exemptions work, and what property is non-exempt in an Ohio bankruptcy.

Source: Examiner, "Chapter 13 Debtors Have Options When Plan Payments No Longer Feasible," Elizabeth Fletcher, July 24, 2012

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