Chapter 13: What Happens to Debts Paid Before Dismissal?

In a Chapter 13 bankruptcy, the debtor does not have any debts discharged immediately. Instead, the court appoints a trustee that closely examines the debtor's current revenues and how much money they can afford to pay. The trustee then creates a payment plan that can last up to five years and requires the debtor to pay off at least a portion of the various debts. At the end of the plan, the rest of the debts are discharged. The debts paid are permanently removed from consideration even before the plan is finished, but a dismissal can complicate the issue.

Dismissal

A dismissal is not a discharge, although the two terms can be confusing. A discharge is a court removal of any remaining debts that have not been paid off by the end of the plan, usually unsecured debts that ranked low in important. A dismissal, however, occurs when a debtor is unable to continue making payments on the plan and the court ends it early, leaving debts. This is unfortunately common as debtors see reduced income or fall even further into debt. However, the past payments of the plan still affected the debt held.

Fully Paid Debts

Fully paid debts are those that the debtors has already completed paid off during the plan. This is common for smaller debts that the trustee attributes a large portion of each monthly installment toward, in order to pay them off as quickly as possible. Credit card debt may be one type that is fully paid, or an auto loan with only part of the payments still due. When these debts are paid off by the plan, the creditor has no more claim on the debtor for repayment, and the accounts are closed.

Partially Paid Debts

Partially paid debts that have not been fully dealt with by the time the plan has been dismissed are more problematic. In this case the debt continues and creditors can typically take additional legal actions and sue for repayment. Sometimes a creditor will be promised only 10 to 20 percent repayment by the plan, and receive that amount, but if the plan is dismissed early will try to collect the rest of the debt as well. Secured creditors can often get permission to foreclosure on houses or seize other assets to recover the money they are due.

Conversion

Because Chapter 13 dismissals are so common, there is a key option that debtors use when it occurs, known as a conversion. This conversion is a plea that the court switch the Chapter 13 plan to an immediate Chapter 7 bankruptcy. This bankruptcy discharges all current debts, but allows the trustee more freedom in taking and selling debtor assets to pay off key creditors. It is typically a much better solution than allowing unpaid creditors to sue for money still owed.