Your comprehensive guide into Chapter 13 dismissal refund

Have you started receiving incessant calls from debt collectors? Is your mailbox filled with letters from addresses like PO Box 1280 Oaks PA demanding payments?

If so, it may be time to consider filing for bankruptcy. While there are many different types of bankruptcy, like Chapter 7 or Chapter 11, sometimes Chapter 13 bankruptcy is the best option available.

Chapter 13 bankruptcy offers you a longer time to clear your debt, between 3-5 years. However, it requires a lot of consistency and motivation to manage to repay a debt for almost half a decade. Unfortunately, the lack of motivation is not why chapter 13 cases fail. 

Disruption in income, lack of resources, and failure to work with an attorney during the case are common reasons why chapter 13 cases get dismissed. Here is a detailed guide on what happens if you don’t follow through with your payment, what to do next, and whether you qualify for a Chapter 13 dismissal refund.

Understanding how Chapter 13 dismissal refund works and what debt collector can do

When filing bankruptcy under Chapter 13, the United States Trustee will appoint a bankruptcy trustee to you. The role of the trustee is to represent the debtor estate during the bankruptcy proceeding. A trustee is tasked with reviewing all the bankruptcy paperwork, going through the proposed repayment plan to ensure it complies with the bankruptcy laws. They are also responsible for collecting plan payments, and distributing these funds to the creditors. 

Although a Chapter 13 trustee is legally allowed to hold any money from the debtor undistributed to creditors, the money returns to the debtor after the Chapter 13 case is dismissed. Before returning the money, the trustee should file a comprehensive accounting record with the court.

The trustee is legally allowed to deduct any outstanding administrative fees the debtor owes before returning the remaining funds. Therefore, it may take some weeks to get a Chapter 13 refund after your case gets dismissed.

If you had been working with a bankruptcy attorney, they might claim their professional fees from the dismissal refund. Depending on the case, the refund may be subject to garnishment under the IRS levy. Usually, when your Chapter 13 case gets dismissed, the automatic stay is lifted. Thus, creditors, including the IRS, can begin taking action to recover their debt.

That said, after your Chapter 13 bankruptcy is dismissed, debt collectors could continue pursuing you for unpaid debt. In this case, you may be interested in this 11 word phrase to stop debt collectors immediately. 

What options do I have after a Chapter 13 dismissal?

Nobody anticipates their Chapter 13 case being dismissed. Therefore, after dismissal, you might feel confused and overwhelmed. Remember, after filing bankruptcy, you are protected from creditors by an automatic stay. After dismissal, the automatic stay is lifted, giving them the right to take any legal collection action. So, what do you do next? You have two options.

First, you can refile for bankruptcy again under Chapter 13 or 7. Whether the automatic stay goes into effect immediately after filing for bankruptcy greatly depends on the reason for dismissal. Nonetheless, even if the automatic stay can go into effect, the court could place a penalty period before it becomes effective. If your case was dismissed due to prejudice, you might need to wait 180 days before re-filing. 

Second, you can opt for debt settlement or convert your case from chapter 13 to Chapter 7 before dismissal. 

What you need to know about converting to Chapter 7 before a Chapter 13 dismissal

While Chapter 13 presents an opportunity to solve your financial problems, it is not an easy to complete plan. Sometimes, hurdles like loss of income happen, leading to delayed payments and finally dismissal. Fortunately, you can get ahead of the dismissal by converting Chapter 13 to Chapter 7. However, Chapter 7 presents a unique set of challenges, like liquidation. 

When you file for Chapter 7, the bankruptcy court may have you turn over assets and property and sell them to repay your creditors. You can avoid liquidation if a bankruptcy exemption covers the equity. Sometimes, it is wise to sell an asset to cover the outstanding debt. Here is more information about the Chapter 7 bankruptcy process.

Common reasons for a Chapter 13 dismissal

When drafting your repayment plan, you did not anticipate changes like lack of resources or change in income. Since a Chapter 13 plan is typically a commitment for three years or more, a lot can happen within this duration that could result in a dismissal, such as:

  • Voluntary dismissal — as a debtor, you can change your mind and quit the Chapter 13 plan since it is a voluntary payment plan. 
  • Not filing tax returns —despite being bankrupt, debtors are required to file income tax returns and other returns as citizens. Failing to file these returns may result in dismissal.
  • Falling back on Chapter 13 payments — when presenting a payment plan to your creditors during the bankruptcy case, you present a plan that will work best for you. Therefore, missing payments could lead to dismissal. However, if you have a valid reason for a missed payment, your bankruptcy attorney can negotiate a few months when creditors suspend payments. You could also consider Chapter 7 bankruptcy. For example, there is such a thing as an affordable Chapter 7 bankruptcy.
  • Skipping out on bankruptcy courses — when you file for bankruptcy, the court will enroll you for mandatory bankruptcy courses, which you must complete. Failing to complete these courses could lead to dismissal.
  • Missing hearings —failing to attend the creditors’ hearing or other subsequent hearings after filing your case could force the court to dismiss your case.
  • Falling behind schedule — there is a lot to do when filing for Chapter 13. Thus, there are deadlines you need to meet. Failing to meet these deadlines could result in dismissal. 
  • Filing Incomplete bankruptcy forms — when filing for bankruptcy, you need to accurately complete all forms and file them. If you fail to file a required document, the court might dismiss your case.

What is the effect of a Chapter 13 dismissal?

When a court dismisses your Chapter 13 case, your debts are not forgiven. So you owe all the debts you filed when filing your bankruptcy case.

If your case was dismissed after making a series of payments, your creditors should credit you for all payments received through your trustee. Nonetheless, they can take legal collection efforts for the remaining amount, including foreclosures, wage garnishments, and repossessions.

Get expert help choosing the best debt relief option

It’s important to keep in mind that bankruptcy regulations vary from state to state. You may be wondering how much does it cost to file bankruptcy in New Mexico? Well, the cost to file bankruptcy in New Mexico may be different from the cost to file Bankruptcy in Wisconsin. Talking to experts can help you determine what your bankruptcy might look like depending on where you live. 

Once a court dismisses your Chapter 13 bankruptcy case, your creditors will take all actions to recover their debt. Consult our experts today to help settle for the best debt relief option depending on your financial situation.