What Happens to an Unsecured Loan After Chapter 13 Has Been Dismissed?

When you file for bankruptcy protection under Chapter 13, you are asking a federal court for protection from your creditors. The court issues an automatic stay, meaning your creditors must stop all collection efforts and lawsuits against you. A trustee then draws up a repayment plan, which schedules monthly payments that will repay a portion of your unsecured debts. If you fail to meet the payments, the court may dismiss the case — and there will be important consequences for those unsecured debts.

A Chapter 13 bankruptcy establishes a repayment plan for a portion of your unsecured debts. These are debts without security or collateral that guarantees repayment. The most common example of an unsecured debt is a credit-card account, for which you don't pledge any property as collateral. Medical bills and tax debts are also unsecured. If the court finds that you have violated the terms of the Chapter 13 proceeding, then it may dismiss the case. A dismissal means the court closes the case and lifts the automatic stay protecting you from creditor collection actions.

The most common reason for dismissal of a Chapter 13 bankrtupcy case is failure by the debtor to meet the terms of the repayment plan. After dismissal, an unsecured creditor can again start collection action against you. This means your debt is again collectible in full, and the creditor can send you account statements, call you at a reasonable hour to arrange repayment, or file a lawsuit to enforce the debt in civil court. Varying state laws impose a "statute of limitations" on creditors for filing a civil action to collect the debt after you stop paying it. This period of time is suspended while the automatic stay is in effect, but resumes after the bankruptcy is dismissed.

After dismissal, you again become fully liable for the original debt, plus any interest and penalties imposed by the creditor. You can refile for another Chapter 13 bankruptcy after dismissal, but the court can reject your petition if it found you acted in bad faith or otherwise abused the system. If the court accepts the new petition, it will impose another automatic stay and repayment plan.

The conditions for dismissal of a Chapter 13 case are explained in 11 USC § 1307, a section of the federal bankruptcy code. If your case has been dismissed, the original bankruptcy filing still remains on your credit report for up to 10 years. Your creditors may also report any late payments on unsecured debts, as well as referrals to collection agencies. If the case is converted to a Chapter 7, the court extends the automatic stay on the unsecured debts, which are eventually discharged at the conclusion of the case.