Yes You Can Refile Your Chapter 13 Case, But Should You?
If you are facing a foreclosure, vehicle repossession, wage garnishment or other financial crisis, Chapter 13 bankruptcy can be a great tool to stop the chaos. As the type of bankruptcy that includes a repayment plan, Chapter 13 can empower you to reduce your monthly payments, eliminate accruing interest on credit card debt, reduce your total indebtedness – all while protecting your real and personal property from creditor actions.If you are facing a foreclosure, vehicle repossession, wage garnishment or other financial crisis, Chapter 13 bankruptcy can be a great tool to stop the chaos. As the type of bankruptcy that includes a repayment plan, Chapter 13 can empower you to reduce your monthly payments, eliminate accruing interest on credit card debt, reduce your total indebtedness – all while protecting your real and personal property from creditor actions.
When Chapter 13 plans work, they can literally be life changing and every experienced bankruptcy attorney can recount stories of grateful clients who successfully completed their Chapter 13 plans with property intact and debt gone.
Unfortunately, however, most Chapter 13 plans fail before completion – in some jurisdictions the failure rate is 65% or higher. Often repayment plans fail not because of bad faith on the part of debtors or even because of unrealistic budgeting.
Sometimes cases fail because debtors don’t fully understand their obligations under their filed plan, or because their lawyers are inexperienced with Chapter 13 law and practice.
Many times plans fail because of the same unpredictable factors that drive people into bankruptcy in the first place:
unexpected job loss or changes
unexpected home or vehicle repair needs
Unfortunately, most Chapter 13 trustees will not allow you to allocate any money from your household budget to an “emergency fund.” Instead, every penny of your disposable income must be paid into your Chapter 13 plan.
This means that for the duration of your Chapter 13 case – usually 60 months (5 years) you have to hope that you experience no interruption in pay, no unexpected home or vehicle repairs, and no family emergencies. And if you do have an emergency you have to contact your lawyer and file a motion to suspend payments, or reduce your plan payments and hope that the numbers work and that you can struggle through.
Statistics, in the form of the high rate of failing Chapter 13 plans, suggests that the bankruptcy system’s current approach to household budgeting does not work but until a change occurs in the “institutional mindset” we are stuck with the current system.
If your Chapter 13 Repayment Plan is Dismissed by the Court You Can Refile…With Strings Attached
If your case does get dismissed because of your failure to keep your trustee payments current, you (usually) do have the option to refile. However the bankruptcy law does not assume good faith for refiled cases.
A number of years ago, bankruptcy judges looked at refiled Chapter 13 cases on a case by case basis. And, yes there were some abuses. Dishonest debtors would file Chapter 13 to stop a foreclosure, then transfer the property to friends and relatives who would file, dismiss and refile solely for the purpose of avoiding foreclosure and living in homes for free. In states with judicial foreclosure, where the process can take months or years, a scheming debtor could live for free indefinitely.
Obviously these cases of abuse captured the headlines, even while the majority of dismissed Chapter 13 plans arose from the classic factors of income loss and/or untimely expenses.
Cases of abuse make for good theatre, so Congress decided to solve a small problem with a sledgehammer. In 2005, Congress changed the bankruptcy laws to discourage refiled cases. Under the law, if your Chapter 13 case is dismissed, and you refile a second case within 1 year from the date that the first case was still in force, the automatic stay will remain in force for only 30 days. If you want the stay to remain in force longer, you have to file a Motion, get a court date and appear before a bankruptcy judge to explain why your second case was not filed in bad faith.
If you need to file a 3rd or subsequent case within one year that a prior case was pending, the automatic stay does not go into effect at all, meaning that if you are trying to stop a foreclosure or repossession, bankruptcy will not help you in an emergency situation. You can schedule a hearing before a judge to explain why your third case is legitimate but you can expect a 20 to 30 day wait time before a hearing can be scheduled.
Should You Refile?
Given the likelihood that your Chapter 13 case will fail, your requirement to project a 5 year budget that does not allow for emergencies, and the hostility of the bankruptcy law to refiling, what should you do if your Chapter 13 case is dismissed because of an unexpected financial event?
I think that you and your lawyer should have a realistic talk about what to do. You may decide to give Chapter 13 another shot but if you do, recognize that you could be “throwing good money after bad” and only delaying the inevitable.
When I counsel Chapter 13 clients about refiling I look critically at all secured debt. Would it make sense to look for a cheaper place to live or a less expensive form of transportation? Can we give up hard assets to make the Chapter 13 plan less expensive and my clients’ budget less tight? Does it make sense to look into filing or converting to Chapter 7 and starting over?
If we do choose to refile, does my client understand the risks and the reality that this refiled case is his/her last chance to make Chapter 13 work? Is household income stable enough to get us through at least one year, if not the full 5 year term of a Chapter 13 plan?
However you decide to proceed, you should go into a refiling with a different mindset that you might have with a first time filing. I tell my clients “if you are meeting with a bankruptcy lawyer everything needs to be on the table.” This is never more true than when considering refiling your Chapter 13 case.