Are you drowning in debt and looking for relief? You may be considering bankruptcy as a way to help ease your financial stress. Bankruptcy can be the right solution in some situations, but it comes with drawbacks. In this guide, we break down everything you need to know about Chapter 13 bankruptcy and alternatives you should consider as well.
What is Chapter 13 bankruptcy?
Chapter 13 bankruptcy is a way for you to reorganize or restructure your debt payments. Under Chapter 13, you’ll work with your creditors and the federal bankruptcy court to create a new plan.
By filing Chapter 13, you have the option to keep your assets and pay your creditors some or all of the debt over three to five years.
With 296,599 filings in 2017, Chapter 13, also known as the wage earner’s bankruptcy, is the second most common type of bankruptcy filing.
Who is eligible for Chapter 13 bankruptcy?
Chapter 13 is referred to as a “wage earners” plan because you must have a regular income to qualify.
In addition, here are the other requirements you must meet to be eligible for Chapter 13 bankruptcy:
- You must be an individual. Businesses are not allowed to file for Chapter 13.
- You can’t have unsecured debts over $394,725 or secured debts over $1,184,200.
- You can’t have a bankruptcy petition dismissed within the last 180 days due to your failure to appear before the court or comply with court orders.
- You can’t have voluntarily dismissed a bankruptcy filing in the last 180 days because your creditors sought court relief to recover property on which they had a lien.
What debt does a Chapter 13 plan cover?
As part of your repayment plan, debt is broken down into three claim categories: secured, priority unsecured, and nonpriority unsecured. Your debt will be treated differently depending on the category.
Secured claims include debts that are secured by collateral, like a home mortgage or auto loan.
These claims have to be paid in full if you want to keep the collateral securing the loan (e.g. your home or car). Filing a Chapter 13 bankruptcy allows you to restructure your payments.
But if you choose to surrender the property, then bankruptcy will generally discharge the debt.
There are different rules for different secured claims, so it’s best to consult with your attorney to understand the details.
Priority unsecured claims
Priority claims are unsecured debts (not secured by collateral) that can’t be discharged. These debts have priority over other debts because they affect the well-being of others. For example, priority claims include things like:
- Child support.
- Spousal support.
- Certain taxes.
- Debts owed for causing personal injury or death to another person due to intoxication.
Bankruptcy will not wipe out your debt obligation on these claims unless you pay them in full through the case. So, any remaining amounts that aren’t paid in bankruptcy will be considered outstanding.
Nonpriority unsecured claims
Most nonpriority unsecured claims can be discharged in bankruptcy, with the exception of student loans. Common nonpriority claims include items such as:
- Personal loans.
- Credit card debt.
- Medical bills.
- Utility bills (e.g. electric, gas, telephone, etc.).
- Back rent.
- Membership fees (e.g. health club).
Although student loans are unsecured, they aren’t treated the same as other unsecured debts in a bankruptcy filing. To get your student loans discharged, you’ll have to prove that paying them would cause undue hardship—and that isn’t easy to do.
How much does Chapter 13 bankruptcy cost?
Filing for bankruptcy isn’t cheap. When you file, you’ll need to pay a $310 fee, which includes a $235 filing fee and a $75 miscellaneous fee.
It’s also recommended that you hire an attorney, which can significantly add to the cost.
How is chapter 13 different from Chapter 7 bankruptcy?
Chapter 13 is a reorganization of your debt. It’s best for someone who is still able to pay some of their debt payments each month but struggles to pay the full amount.
Chapter 7 is a liquidation of debt. The court appoints a trustee to sell your non-exempt assets to pay as much of your debt as possible.
Once the trustee sells your assets, any remaining debt will be discharged. Chapter 7 is best for people who have a lot of qualifying unsecured debt (e.g. credit card debt or medical bills) and not a lot of assets.
Also, you have to prove that your income levels meet the requirements for a Chapter 7 bankruptcy. With a Chapter 13 bankruptcy, anyone can file regardless of his or her income level.
Compare the features of Chpater 13 and Chapter 11 bankruptcies before you make a decision.
Chapter 13 Bankruptcy
- Reorganization (not a liquidation) of debt.
- Ideal for people with an income who can make regular payments.
- Helps you keep your assets.
Chapter 7 Bankruptcy
- You may have to liquidate (sell) your stuff.
- Only works with unsecured debt.
- You must meet the income level requirements.
How is Chapter 13 different from Chapter 11 bankruptcy?
Chapter 13 and Chapter 11 have similar goals: to help you keep your assets and create a new payment plan so creditors still receive at least a portion of their money.
But there are two key differences between Chapter 13 and Chapter 11 bankruptcy: eligibility and debt limits. As of 2018, Chapter 13 has a $394,725 limit on unsecured debt and a $1,184,200 limit on secured debt.
Compare the features of Chpater 13 and Chapter 11 bankruptcies before you make a decision.
Chapter 13 Bankruptcy
- Only available to individuals.
- Debt limits apply
Chapter 11 Bankruptcy
- Businesses and individuals can apply.
- No debt limits.
The Chapter 13 bankruptcy process
Going through Chapter 13 bankruptcy is a long process. Depending on your income, you’ll create either a three- or five-year debt repayment plan.
Listed below are 13 key steps included in the process.
1. Credit counseling
Within 180 days before filing for Chapter 13 bankruptcy, you must complete a counseling course from an approved credit counseling agency. During the credit counseling program, you may have the option to create a debt repayment plan.
2. Hire an attorney
While you don’t have to hire an attorney, it’s recommended that you hire one to help you properly navigate the bankruptcy process.
3. Filing a petition
Once you’ve completed the first two steps, you will file a petition for bankruptcy. Along with this petition, you’ll file:
- Schedules of assets and liabilities.
- A schedule of current income and expenditures.
- A schedule of executory contracts and unexpired leases.
- A statement of financial affairs.
4. Pay required fees
When filing a petition, you’ll pay a $235 case filing fee and a $75 miscellaneous administrative fee.
5. Submit your payment plan
Once you file your petition, you have up to 14 days to submit your payment plan. This plan will include a list of all creditors and how much you owe them.
The plan also needs to include details about your monthly living expenses, as this will affect how much you can repay.
6. A trustee is appointed
The court appoints an impartial trustee to oversee your case. During bankruptcy, you’ll make payments to the trustee and they’ll disburse the money to your creditors.
7. Automatic stay
Once you file the bankruptcy petition, a stay automatically goes into effect. This means that creditors aren’t able to continue collection activities or repossess any property while a plan for bankruptcy is being created. This includes stopping any home foreclosure proceedings.
8. Meeting of the creditors
Between 21 and 50 days after filing, the trustee holds a meeting of the creditors. You’ll be placed under oath during this meeting. Both the trustee and the creditors may ask you questions regarding your financial affairs and the proposed plan terms.
9. Begin making payments to the trustee
You’ll have to begin making payments to the trustee within 30 days after filing, even if the court has not yet approved the payment plan.
10. Confirmation hearing
No later than 45 days after the meeting of the creditors, the bankruptcy judge must hold a confirmation hearing to approve or reject the plan. If your plan is rejected, you have the opportunity to submit another plan or convert to a Chapter 7 liquidation bankruptcy.
11. Finish payments
Over the next three to five years, you’ll continue to make the payments detailed in your plan. If you have a longer loan, like a mortgage, you’ll continue making loan payments until the loan is paid off.
12. Financial management course
Prior to discharge, you may be required to complete an approved course in financial management.
Once you’ve completed the payment plan, your debt enters discharge. Discharge from Chapter 13 is complex and you should consult with an attorney to understand the specific debts that will be discharged in your situation.
Chapter 13 bankruptcy pros and cons
Here is a list of the benefits and the drawbacks to consider.
- You have the opportunity to keep your house and other assets while making payments.
- You don’t need to meet strict income requirements as you do in Chapter 7.
- It’s removed from your credit report three years sooner than Chapter 7.
- You have more time to make your payments, and trustees may be flexible on your payment terms.
- You can repeatedly file for Chapter 13 (if necessary), whereas you can only file under Chapter 7 every six years.
- While making payments, you get to keep the property you are making payments on.
- It’s a lengthy process and will take three to five years to complete.
- It will stay on your credit report for seven years.
- Negatively affects your credit score (could cause your score to drop 160 to 220 points).
- You must pay debts from your available income, meaning whatever income is left after paying for the necessities. So, you won’t have much—if any—extra cash during the entire repayment period.
- Can make it difficult to get a mortgage if you don’t already have one.
- It’s best to hire an attorney, which can make the process very expensive.
FAQ on Chapter 13 bankruptcy
How does a Chapter 13 bankruptcy work?
A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. Under this chapter, debtors propose a repayment plan to make installments to creditors over three to five years.
Can you be denied Chapter 13 bankruptcy?
If you’ve failed to file any state or federal tax returns in recent years, take care of this before filing for Chapter 13 protection or you can be denied. The meeting of creditors is typically scheduled early in Chapter 13 proceedings, so this may not give you a lot of extra time.
How long does a Chapter 13 bankruptcy last?
Chapter 13 bankruptcy allows debtors to reorganize their debts, catch up on missed mortgage or car loan payments, and pay off non-dischargeable priority obligations through a repayment plan. Most Chapter 13 plans must be three to five years long. But how long your repayment plan will last depends on: your income, and the amount of time you need to pay off the debts.
What debt is included in Chapter 13?
To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $394,725 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,184,200 in secured debts, which includes mortgages and car loans.
What happens when Chapter 13 is discharged?
Debts that can be discharged and the amount of the discharge all depend on whether you file Chapter 7 or Chapter 13 bankruptcy. In Chapter 13 bankruptcy, you enter a repayment plan that repays all or most of your debt. At the end of your repayment plan, the remaining debt will be discharged.
Alternatives to consider
Filing for Chapter 13 bankruptcy is a big decision that can impact your financial health for years. It’s an option to provide debt relief for people who really need it.
However, there are other alternatives you should consider first, like debt settlement and tax relief.
If you’re struggling with unsecured debt, debt settlement may provide the relief you need.
Debt settlement helps you restructure or reorganize your debt so that you can pay it off more easily. You are often able to negotiate to settle your debt for less than you owe.
Though debt settlement is an effective tool for negotiating payments with creditors, it has its drawbacks. Debt settlement can have a negative impact on your credit score.
During the settlement process, you stop making payments to your creditor. These missed payments will show up on your credit report and will cause your credit score to decrease.
If your creditor reports your debt as settled, rather than paid in full, it can negatively impact your credit score. Just like with bankruptcy, debt settlement can impact your score for years.
It can, however, help you avoid the lengthy Chapter 13 bankruptcy process and other negative consequences. Once you’ve settled your debt, you can begin the process of rebuilding your credit.
Chapter 13 bankruptcy won’t discharge taxes that you owe. Most taxes are considered a priority claim and must be paid. If you’re looking for help with unpaid taxes, you may want to consider tax relief.
A tax relief attorney can help you negotiate a reduction in the amount of taxes that you owe or create a repayment plan that you can afford.
Andrew is the managing editor for SuperMoney and a certified personal finance counselor. He loves to geek out on financial data and translate it into actionable insights everyone can understand. His work is often cited by major publications and institutions, such as Forbes, U.S. News, Fox Business, SFGate, Realtor, Deloitte, and Business Insider.