What a Drop Dead Provision in a Bankruptcy Means

Debtors in a Chapter 13 bankruptcy get to keep their property, providing that they continue to make agreed-upon payments. "Drop-dead" provisions provide some protection to creditors in case a debtor fails to meet plan obligations.

A Chapter 13 bankruptcy is actually an extended repayment plan. Debtors are expected to repay their creditors over a long period of time (three to five years) while living on a strict budget. At the end of the plan, the court discharges the balance of any unsecured debt.

A secured creditor holds interest in property owned by its debtor. Under the terms of the debt agreement, the secured creditor can take the property and sell it to satisfy the debt if the debtor fails to repay the debt as agreed. Mortgage lenders and car financing companies are both secured creditors in that they can foreclose on the home or repossess the car of a debtor who doesn't make his payments.

When someone files for bankruptcy, the court orders her creditors to cease collection efforts. Creditors, even those who have judgments against the debtor, can't call her, send her threatening letters or continue to seize her wages or bank account. The stay also affects secured creditors who can't file for a foreclosure or repossess a car unless they can persuade the bankruptcy judge to lift the stay and allow them to continue with reclaiming the asset.

When someone files for Chapter 13 bankruptcy, his debts are prioritized for repayment. Debtors can choose to include secured debts in their repayment plan, though some may decide to give up their house or car in order to concentrate on paying other debts.

Secured creditors that are concerned about getting repaid may insist that a repayment plan include a "drop-dead provision" that immediately lifts the automatic stay if the debtor misses a payment. This provision allows a creditor to repossess or foreclose on the property and recoup its losses without further negotiation with the debtor. Variations on the drop-dead clause include the requirement that a debtor get insurance on the collateral by a certain date, or that the court dismiss a debtor's Chapter 13 bankruptcy or convert it to Chapter 7 when the debtor fails to make a payment.