What Happens If Noncompliance in a Bankruptcy Agreement?

Adhering to the terms and conditions of a bankruptcy agreement is critical. Agreements typically forbid continued use of credit or require a minimum contribution to a court-ordered payment plan each month. Other terms are possible as well. Failing to comply with terms could result in dismissal of the bankruptcy suit and wasted money on bankruptcy filing fees and attorney costs.

Ramifications

Noncompliance and dismissal of a bankruptcy case remove important protection. Everyone in bankruptcy benefits from a legal injunction called the automatic stay. The stay is the most powerful provision in bankruptcy, as it prevents debt collectors from continuing collection efforts during the bankruptcy. The stay stops enforcement of judgments, ends bank and wage garnishment and stops all lawsuits. The stay ends the day the judge dismisses the bankruptcy because of noncompliance. The move allows debt collectors to resume full collection efforts -- including garnishment.

Considerations

The bankruptcy judge makes decisions on case dismissals, and not every act of noncompliance leads to an automatic dismissal. Minor indiscretions, such as failing to list a debt in the bankruptcy agreement, may lead only to an admonishment by the court and an adjustment of the bankruptcy application. However, applying for and using more credit without the court's permission or hiding income could result in a quick dismissal. Noncompliance issues and resulting dismissals are a key reason bankruptcy courts recommend that people file for bankruptcy with the help of an experienced attorney. People who represent themselves often don't fully understand all the rules because of the complexity of bankruptcy. That can lead to noncompliance because of procedural errors. An attorney serves as a resource throughout the bankruptcy and can help avoid mistakes.

Payments

Failing to make court-ordered payments is an example of noncompliance. Payment plans are a part of Chapter 13 bankruptcy. Chapter 13 requires a payment plan of three to five years. The plans pay unsecured creditors after allowances for reasonable living expenses and payments on secured debts. The bankruptcy trustee sets the amount for the payment plan, and payments are mandatory. However, the court is willing to show some flexibility. The United States Bankruptcy Court For The Middle District of Florida reports that disclosing an inability to make the payments could lead to an agreement for making the payments later. Dismissal is next if an agreement is not possible.

Refiling

Filing a new bankruptcy petition -- or converting to another form of bankruptcy -- are the only options after dismissal. For example, some people unable to make Chapter 13 payments because of a new job layoff find they qualify for Chapter 7 after several months of reduced income. In that case, the court allows for conversion to Chapter 7. Chapter 7 has income limits that vary by state. Usually only people with low income or long-term unemployment qualify. There are no income limits for Chapter 13. Also, the court may require a waiting period for refiling depending on the circumstances of the dismissal.