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Sometimes dismissing Chapter 13 is best for debtor

Many Massachusetts residents filing for a Chapter 13 bankruptcy do so to make manageable payments on their debts without having to turn over their home or other possessions.

However, sometimes a debtor in the midst of a Chapter 13 repayment plan may find himself or herself in a position where it makes the most sense simply to dismiss the case voluntarily.

For example, if in the middle of a Chapter 13 a homeowner manages to sell his or her home at a good price, it might make more sense to walk away from the bankruptcy and pursue other forms of debt relief instead. The person may even decide to devote the proceeds from the house sale to paying down debts and thereby get a fresh financial start on their lives.

While a debtor can in theory sell his or her home in the middle of a Chapter 13, he or she must get permission from the bankruptcy court in order to do so. This may not be as easy as it seems at first glance, as the court will give creditors ample time and opportunity to weigh in on the decision.

Moreover, oftentimes banks are less willing to extend credit to a person who is involved in an active bankruptcy case. The laws pertaining to bankruptcy make it more difficult and riskier for a bank to loan money to a person, so dismissing a bankruptcy may make it easier on a person to get immediate credit.

On the other hand, at least one expert says that a person who dismisses a bankruptcy will still have to prove his or her creditworthiness to prospective new lenders who could be leery of that person even if he or she did not technically complete the bankruptcy process.

Dismissal can also carry with it other legal consequences as well; for example, a prior dismissal can limit a person's right to be protected from creditors upon filing a bankruptcy in the future. Therefore, those who are considering this option really should speak to their bankruptcy attorney before making up their minds.

Source: Fox Business, "Can you dismiss Chapter 13 bankruptcy to sell home?" Justin Harelik, April 16, 2013

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