One of the chief benefits of bankruptcy is the ability to restructure your finances under court supervision and protection. A confirmed Chapter 13 plan means that pre-bankruptcy creditors cannot sue or harass you as long as you stick with your plan. The problem is that Chapter 13 bankruptcy lasts a minimum of 36 or 60 months, depending on your income. What if you don’t want to wait that long and want out early?
You have four options for terminating a Chapter 13 case early, receiving the benefits of a bankruptcy discharge, and walking away:
Convert Your Case: You may be able to convert your Chapter 13 case to one under Chapter 7, receive a discharge, and end your case early. This is especially useful if you have paid a secure arrearage during the bankruptcy case or otherwise cured a default. For instance, suppose you are an under-median debtor behind on your mortgage and forced into Chapter 13 because your mortgage lender refused to accept payments. If you are able to obtain a home loan modification during the repayment period, you may decide to convert your case to Chapter 7 and include the post-petition canceled mortgage debt in the bankruptcy discharge along with all other dischargeable debts. You can convert the case at any time, as long as you otherwise qualify.
The growing trend among appellate courts interprets the bankruptcy “applicable commitment period” as a minimum time a debtor must remain in bankruptcy. In other words, you must remain in Chapter 13 bankruptcy a minimum of 36 or 60 months. The only exception to this minimum period is if you repay all of your unsecured claims in full as provided in Section 1325(b)(4)(B) of the Bankruptcy Code.
A Chapter 13 hardship discharge may be granted by the bankruptcy court if you are unable to complete your repayment plan, and will end the case before the plan termination date. To obtain a hardship discharge you must first show an inability to continue making the scheduled Chapter 13 plan payments and that modification is not practical. Hardship discharge is available when something serious has happened that reduced your income or ability to (re)pay creditors. The change must be beyond your control, and creditors must receive at least as much as they would have received during a Chapter 7 case. The Bankruptcy Code limits the scope of the hardship discharge to that of a Chapter 7 discharge, so some debts that are dischargeable in a Chapter 13 case are not discharged if the case ends early for hardship.
Modify Your Plan
Some bankruptcy courts may allow an above-median debtor at the time of the case filing to modify the bankruptcy case after confirmation to reduce the time of repayment when the debtor’s income drops below the state median income level. These courts hold that the “disposable income” test, as set forth in section 1325(b) of the Bankruptcy Code does not apply to modified plans under Section 1329. A modified plan must still continue for a minimum of 36 months.