The other common form of bankruptcy (for individuals) is Chapter 13 bankruptcy. Chapter 13 bankruptcy requires you to create a debt repayment plan based on your expected income. You’ll make monthly payments on your debt for three years in most cases (but up to five years in select cases). After you’ve completed the payment plan, the court discharges the remaining debt.
Some people have to file Chapter 13 bankruptcy. For example, most people who earn more than their state’s median income will be required to file Chapter 13 bankruptcy.
However, some people opt for Chapter 13 bankruptcy to protect their assets. Chapter 13 bankruptcy generally allows you to keep all your assets, including your house and your car. Your debt repayment plan will prioritize any payments to your car or home loan, and it will state the requirements for retaining the title to your car or home. Legally, your debt repayment plan must provide more money to your creditors than if you liquidate your assets under a Chapter 7 bankruptcy.
In general, bankruptcy attorneys will include their fees in the payment plan. That means they won’t charge you upfront for their services (in most cases).
One of the most common uses for Chapter 13 bankruptcy is to save a home from foreclosure. In general, filing Chapter 13 bankruptcy stops foreclosure proceedings. It gives you the opportunity to create a repayment plan that will get you out of arrears. Of course, to save the house in the long run, you must continue to make your mortgage payments after filing.
Who qualifies for Chapter 13 bankruptcy?
Most individuals or businesses may opt to file Chapter 13 bankruptcy. However, you cannot file Chapter 13 bankruptcy if you’ve had debts discharged in bankruptcy too recently. If you’ve been discharged through a Chapter 7, 11 or 12 bankruptcy in the last four years, or a Chapter 13 bankruptcy in the last 2 years, you cannot file.
Chapter 13 bankruptcy also limits the amount of debt you can have. Right now, you can file Chapter 13 bankruptcy if you have less than $394,725 in unsecured debt (such as credit cards and personal loans) and $1,184,200 in secured debt (such as mortgages or car loans).
What happens to your debts?
In Chapter 13 bankruptcy, you repay some or all of your debts through a three to a five-year repayment plan. Over the course of three to five years, you have to pay your creditors at least as much as you would pay by liquidating your assets under Chapter 7 bankruptcy.
Whatever debt isn’t covered by the debt repayment plan is discharged after you complete the payment plan.
What happens to your assets?
In most cases, Chapter 13 bankruptcy allows you to keep all your assets.
“You can think of the Chapter 13 plan payments as buying back your house or your car,” Caldwell says. “You should have given it up in bankruptcy, but you get to keep it by continuing to make payments.”
If you don’t have enough disposable income to pay more than you could pay under Chapter 7 bankruptcy, you may be required to sell some assets.
What to expect after filing
After filing Chapter 13 bankruptcy, your payment plan will generally be approved within 45 days after your creditors’ meeting. You must make plan payments as agreed or risk further legal action against you.
Initially, you can expect your credit score to drop after you file for bankruptcy. The actual size of the hit will depend on how many accounts are part of the bankruptcy filing, and whether those accounts were already delinquent or charged off. If your credit score is in bad shape already, Chapter 13 bankruptcy will make it just a bit worse.
Unfortunately, your credit score may stay low for a prolonged period. This is because you cannot take out new consumer credit during your Chapter 13 repayment period. However, if you have current debts (such as a mortgage or auto loan), you can continue to make monthly payments as agreed. This will allow cause your credit score to climb even during bankruptcy.
Once you complete your payment plan, you can start rebuilding your credit score. The Chapter 13 bankruptcy will remain on your credit report for 7 more years, but you should start to see offers for credit cards and auto loans.
Two years after you complete your payment plan, you can start applying for mortgages.
Who should consider Chapter 13 bankruptcy?
If you don’t qualify for Chapter 7 bankruptcy, Chapter 13 bankruptcy may be the best choice for you. Chapter 13 bankruptcy also makes sense if you own certain assets that you want to keep. Just be sure that you have the cash flow needed to make your debt plan payments.