Are you drowning in debt and looking for relief? You may be considering bankruptcy as a way to help ease your financial stress. In this guide, we break down all the information about Chapter 13 bankruptcy outlined in the bankruptcy code, along with some alternatives you should consider.
What is Chapter 13 bankruptcy?
When you file for Chapter 13 bankruptcy, it’s a way for you to reorganize or restructure your debt payments. In a Chapter 13 case, you’ll work with your creditors and the federal bankruptcy court to create a new strategy.
You have the option to keep your assets and pay your creditors some or all of the deficit over three to five years.
Chapter 13 is the second most common type of bankruptcy (after Chapter 7). According to the latest data, 286,027 Chapter 13 bankruptcies are filed every year.
Who is eligible for Chapter 13 bankruptcy?
Chapter 13 is referred to as a “wage earner’s” plan because you must have a regular income to qualify.
In addition, here are the other requirements you must meet to be eligible for a Chapter 13 bankruptcy case:
- You must be an individual, not a business.
- 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 debts does a Chapter 13 plan cover?
As part of your Chapter 13 repayment plan, debts are broken down into three claim categories: secured, priority unsecured, and nonpriority unsecured. Your debts will be treated differently depending on the category.
Secured claims include debts that are secured by collateral, like a home mortgage or car 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 case allows you to restructure your payments.
But if you choose to surrender the property, then bankruptcy will generally discharge the debts.
There are different rules for different secured claims, so it’s best to consult with your attorneys to understand the details.
Priority unsecured claims
Priority claims are unsecured debts (not secured by collateral) that can’t be discharged. These debts have precedence over other debts because they affect the well-being of others. For example, these claims include things like:
- Child support payments.
- 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—which isn’t easy to do.
How much does Chapter 13 bankruptcy cost?
Filing for bankruptcy isn’t cheap. When you file the bankruptcy forms, you have 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 from a bankruptcy law firm, which can significantly add to the cost.
This plan also doesn’t eliminate the interest rate you’re paying. However, it is often a lower rate than you were paying before.
How is Chapter 13 different from Chapter 7 bankruptcy?
The different types of bankruptcy options vary in how they handle your debt. A Chapter 13 repayment plan reorganizes your balance. It’s best for someone who can still 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 deficit as possible.
Once the trustee sells your assets, any remaining debts will be discharged. Filing a Chapter 7 case is best for people who have many qualifying unsecured debts (e.g. from credit cards or medical bills) and not a lot of assets.
You have to prove that your income levels meet the requirements in Chapter 7 cases. With a Chapter 13 bankruptcy, anyone can file regardless of 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 11 have similar goals: to help you keep your property and assets while creating 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 2020, Chapter 13 has a $394,725 limit on unsecured debts and a $1,184,200 limit on secured debts.
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 a Chapter 13 plan is a long procedure. Depending on your income, you’ll create either a three- or five-year 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 repayment plan.
2. Hire a bankruptcy attorney
While you don’t have to hire a bankruptcy 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 with the bankruptcy court. 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 repayment terms.
6. A trustee is appointed
The court order of an impartial trustee will be made 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. Creditors aren’t able to continue collection activities or repossess any property while a plan for bankruptcy is being created. This includes stopping 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 need 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 mortgage 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 debts enter discharge. 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 can keep your house and other property while making payments.
- No strict income requirements as with Chapter 7.
- Removed from credit reports three years sooner than Chapter 7.
- More time to make payments, and trustees may be flexible on payment terms.
- You can repeatedly file Chapter 13 cases (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.
- Lengthy procedure: three to five years to complete.
- Stays on your credit report for seven years.
- Negatively affects credit scores (could cause your score to drop 160 to 220 points).
- Debts are paid from disposable income, meaning whatever income is left after paying for the necessities. You won’t have much—if any—extra cash.
- Can make it difficult to get a mortgage if you don’t already have one.
- Best to hire an attorney, which can make the process very expensive.
Frequently asked questions about Chapter 13 bankruptcies
How does a Chapter 13 bankruptcy work?
A chapter 13 bankruptcy, or wage earner’s plan, enables individuals with a regular household income to develop an arrangement to repay all or part of their debts. Under this chapter, debtors propose a repayment schedule of installment payments over three to five years.
Is Chapter 13 bankruptcy bad?
As with Chapters 7 and 11, there are advantages and consequences to Chapter 13. It can make repayment more manageable while still allowing you to hold onto your assets. Going through the steps takes a long time, though, and the effects remain on your credit score long afterward. For a full overview, check out our pros and cons list above.
What is a bankruptcy repayment plan?
A bankruptcy repayment plan is an arrangement to pay a set amount to the bankruptcy trustee every month. The trustee uses the money to pay creditors. These plans typically last three or five years. Secured creditors usually get paid in full, while unsecured creditors will typically have to settle for a fraction of what they are owed.
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 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 unsecured debts, such as from credit cards 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 bankruptcy 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 balance will be discharged.
Alternatives to consider
Filing for Chapter 13 bankruptcy debt relief is a big decision that can impact your financial health for years. Given that, there are other options you should consider first. Keep reading for information on noteworthy alternatives.
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.
There are some drawbacks, though. 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 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 journey of rebuilding your credit.
Chapter 13 bankruptcy won’t discharge taxes that you owe. Most taxes are considered a top-tier claim and must be paid. If you’re looking for help with unpaid taxes, you may want to consider tax relief.
Tax relief attorneys can help you negotiate a reduction in the amount of taxes that you owe or create a repayment plan that you can afford.