How to File for Chapter 13 Bankruptcy: Understanding the Basics
When you hear the word bankruptcy, you may think of individuals erasing their debt and losing their assets in one fell swoop. While that’s true for some, many individuals file Chapter 13 bankruptcy, which doesn’t erase debt but helps people keep their assets and pay all or part of their obligations through a structured repayment plan.
If you’re facing financial troubles and considering declaring bankruptcy, it’s important to consider the long-term implications. This guide will explain what Chapter 13 bankruptcy entails, who is eligible to file and how bankruptcy will affect you now and in the future.
What is Chapter 13 bankruptcy? The basics
Chapter 13 bankruptcy is the second most common form of bankruptcy. In 2021, 399,269 individuals filed for bankruptcy, with nearly 30% of those filing under Chapter 13 of the federal bankruptcy code, according to the Administrative Office of the U.S. Courts.
The U.S. Courts refer to Chapter 13 bankruptcy as a “wage earner’s plan.” It’s for individuals who have a regular income but cannot manage or repay all of their debts.
Under Chapter 13, the debtor receives help setting up a plan to pay their creditors in installments over a three- to five-year period. During this time, creditors are not allowed to pursue collection.
Chapter 13 bankruptcy is generally looked upon more favorably than Chapter 7 bankruptcy because, unlike in Chapter 7, the debtor is paying at least some of what they owe. However, it will remain on your credit report for seven years from the filing date.
Pros and cons of Chapter 13 bankruptcy
Even for consumers burdened with large debt, bankruptcy is a big decision that should not be made lightly. Be sure you understand both the risks and benefits when considering whether declaring bankruptcy is the right choice for you.
You can keep assets including your home, car and other personal property
Collection efforts by your debtors must stop as soon as you file
Any cosigners on your debt are automatically protected from collection efforts, unless the court authorizes otherwise
Will remain on your credit report for up to seven years
May impact your ability to get credit, buy a home, buy a car, rent an apartment or even get a job for quite some time
Instead of getting your debt discharged right away (like with Chapter 7), you’ll have to follow a three- to five-year payment plan before debt is discharged
Who can declare Chapter 13 bankruptcy?
Not everyone is eligible for Chapter 13 bankruptcy. To qualify, you must meet several legal and practical requirements.
Applicants must be individuals, not businesses
To qualify for Chapter 13, you must do so as an individual.
“Corporations are not eligible, but sole proprietors are,” says Jen Lee, a debt and credit attorney in San Ramon, Calif.
No recent bankruptcy discharges
If you discharged debt in a Chapter 13 bankruptcy within the last two years or in a Chapter 7, 11 or 12 bankruptcy within the last four years, you are ineligible for Chapter 13 bankruptcy until the waiting period has expired.
Previous bankruptcy case not dismissed
If a prior bankruptcy petition was dismissed within the past 180 days because you either violated a court order to appear before the court or you requested that the court dismiss your case, you’ll need to wait until the 180-day time frame has elapsed.
Must fulfill credit counseling requirement
Any individuals who file for bankruptcy are required to receive credit counseling from an approved agency within a 180-day period before filing a bankruptcy petition.
Total debt within limits
An individual must have unsecured debts of less than $465,275 and secured debts of less than $1,395,875. Unsecured debts are those not backed by an underlying asset (e.g., credit cards, personal loans, medical bills and utility bills). Secured debt is backed by an asset or collateral (e.g., mortgages and auto loans). These amounts are periodically adjusted to reflect fluctuations in the consumer price index.
Must be current on income taxes
You must be current on all income tax return filings when you file for Chapter 13. Additionally, you must file all state and federal income tax returns that become due while your bankruptcy case is open.
Be able to pay all required debts and some unsecured debts
Chapter 13 involves submitting a repayment plan to the court for approval. There are three classes of debt in a bankruptcy case:
- Priority claims: These are debts that are granted special status by bankruptcy law, including certain taxes, child support and alimony. These must be paid in full.
- Secured claims: If you want to keep your home and vehicle, your plan must include keeping up with payments on your auto loan and mortgage.
- Unsecured claims: These do not have to be paid in full, as long as your plan provides that you will put all of your “disposable income” toward these debts over the plan’s term. Also, your unsecured creditors must receive at least as much as they would have if your assets were liquidated to pay off creditors under a Chapter 7 bankruptcy filing.
Must have sufficient income
According to Lee, the bankruptcy code requires that an individual have a regular monthly income in order to file Chapter 13.
“Practically speaking, you also need to be able to propose a repayment plan to the court that meets the requirements of the bankruptcy code and have enough income to make those payments,” she says.
Lee says many of her discussions with clients involve figuring out whether or not they can propose a feasible plan.
Debts that can be forgiven in Chapter 13 bankruptcy
Your Chapter 13 repayment plan may involve paying certain creditors less than the full amount you owe. However, if you make payments as outlined in the approved plan, the remaining balance on those debts will be forgiven at the conclusion of your case.
Debts that may be discharged
- Credit card debt
- Medical bills
- Some lawsuit judgments
- Certain debts arising from car accidents
- Obligations under leases and contracts (depends on what trustee wants)
- Unsecured personal loans
- Some old tax debts
Debts that cannot be discharged
- Your home mortgage
- Alimony and child support
- Certain taxes
- Federal student loans
- Debts arising from killing or injuring another person while driving while intoxicated or under the influence of drugs
- Fines, penalties and restitution levied during your conviction of a crime
Forgiveness of certain secured debts, such as car loans, can be more complicated. In general, if you want to be able to keep your car, your repayment plan must include paying at least the value of the car to the finance company. However, if you financed the vehicle shortly before filing for bankruptcy, you may be required to pay the car note in full, even if the car is worth less than the amount owed on the loan due to depreciation.
How Chapter 13 can affect your credit
Bankruptcy can hurt your credit score, but the extent of its impact depends on your overall credit profile.
If a borrower has a high credit score and clean credit profile, they could see a large dip in their score. However, if the borrower has quite a few dings on their credit profile, their credit score may only drop a bit since their score is probably already pretty low.
You can expect a Chapter 13 bankruptcy to remain on your credit report for up to seven years from the date filed. That’s three years fewer than a Chapter 7 bankruptcy because you’ll repay a portion of your debts under the Chapter 13 repayment plan.
During that seven-year waiting period, you can begin rebuilding your credit. The bankruptcy’s negative impact on your score will lessen over time. In fact, you may be able to qualify for a conventional mortgage as little as two years from the discharge date of a Chapter 13 bankruptcy or four years from the dismissal date.
Differences between Chapter 13 and Chapter 7 bankruptcy
Several forms of bankruptcy are available to consumers, but the one you choose depends on your financial situation. The most common types, Chapter 7 and Chapter 13, accomplish different goals and have different results.
When is Chapter 13 the best option?
If you don’t qualify for Chapter 7
If you cannot meet your debt obligations but are unable to pass the Chapter 7 means test, a test that calculates whether you have the capability to repay some of your debts, Chapter 13 may be your best option.
If you have debts that are not dischargeable under Chapter 7
Certain debts are never discharged in a Chapter 7 bankruptcy, including child support, alimony, fines and penalties for breaking the law, certain tax debts and debts arising from killing or injuring someone while driving under the influence of drugs or alcohol. If these debts make up the bulk of the debt you wish to discharge, Chapter 7 may not achieve the desired result. Setting up a repayment plan under Chapter 13 may be a better option.
If you want to repay debt
Some people simply don’t like the idea of walking away from their obligations under a Chapter 7 bankruptcy and would prefer to work with creditors on a repayment plan.
If you want to prevent foreclosure on your home
If you are delinquent on your mortgage payments and are facing foreclosure, filing Chapter 13 gives you an opportunity to save your home and get current on your mortgage payments.
If you want to stop the repossession of your car
If you are delinquent on your car payments and are facing repossession, filing Chapter 13 gives you an opportunity to keep your car and get current with the finance company.
If you want to keep nonexempt property
Chapter 7 bankruptcy requires the debtor to sell certain assets and use the proceeds to pay their debts. You may be able to keep certain exempt assets, such as your home, car, clothing and household items, but other personal property, real estate and investments may be liquidated. If you want to be able to hold on to property that would be liquidated under a Chapter 7 filing, Chapter 13 may be your best option.
How to file for Chapter 13 bankruptcy
Filing for Chapter 13 bankruptcy can be a complex process that takes a long time to compete. Here’s an overview of the steps involved in filing for Chapter 13 bankruptcy.
Find an attorney
You can find plenty of bankruptcy information online, but your best course of action is speaking to an experienced personal bankruptcy attorney who is familiar with the laws of your state. While the natural reaction may be to put off dealing with the unpleasant aspects of your financial situation, delaying, transferring assets to friends and family members, or paying off the wrong creditors can make matters worse in the long run.
If you need help finding an attorney, you can ask for a referral from your accountant, family attorney or friend. You can also call your local bar association, who maintains a list of bankruptcy attorneys in your area.
Take this time to understand the complete picture of your debt. Analyzing how much you owe, the value of any relevant property and the status of your income will help to make your first meeting with an attorney more productive.
The federal Bankruptcy Code requires individuals filing for bankruptcy to get credit counseling within a 180-day period before filing a bankruptcy petition. If you are married, both spouses must attend credit counseling.
The credit counseling agency must be approved by the U.S. Trustee Program. You can find a list of qualified agencies from the U.S. Department of Justice.
Petition and paperwork
Next, you’ll file a petition with the bankruptcy court in your area. In addition to the petition, you will also have to submit:
- A list of all your lenders and creditors as well as the amounts you owe each of them
- Information about where you receive your income, the amount and how frequently you are paid (as well as any expected increases in income after filing)
- A list of all the property you own
- An exhaustive account of your monthly living expenses (rent/mortgage, food, clothing, transportation, etc.) as well as any expected increases in expenses
- A schedule of assets and liabilities
- A schedule of contracts and unexpired leases
- A statement of financial affairs
- Certificate of completed credit counseling
- A copy of the debt repayment plan drafted during credit counseling (if any)
- Documentation on any interest you have in 529 plans or other federal or state qualified education or tuition accounts
- A copy of your tax return or transcripts for the most recent tax year
Filing the petition automatically “stays” collection actions, preventing your creditors from foreclosing on your home, repossessing your vehicle, filing lawsuits, garnishing your wages or even making collection calls.
The court is required to charge a $235 case filing fee and a $75 miscellaneous administrative fee. Typically, you have to pay these fees before filing, but in some cases, the court will permit you to pay in installments over the course of 120 days. If you fail to pay these fees, your case may be dismissed.
You must file your repayment plan with your Chapter 13 bankruptcy petition (or within 14 days of filing), although the court can grant an extension.
The plan must outline the fixed amount you will pay biweekly or monthly to the trustee, as well as how those funds will be distributed to your creditors.
After you file the petition, the court will appoint an impartial trustee to administer your case. It’s the trustee’s job to collect payments from you and make distributions to your creditors under the terms of the plan.
You must start making payments to the trustee within 30 days of filing your petition, even if the court has not yet approved your plan.
Meeting of creditors
Somewhere between 21 and 50 days after your petition is filed, the trustee will hold a meeting of creditors. During this meeting, you will be placed under oath and must answer questions posed by the trustee and your creditors. You (and your spouse, if married and filing a joint petition) are required to attend the meeting and answer questions about your finances and the terms of the proposed repayment plan.
Within 45 days after the meeting of the creditors, the bankruptcy judge will hold a confirmation hearing and decide whether your repayment plan is feasible and meets the requirements outlined in the Bankruptcy Code.
If the court confirms your plan, your appointed trustee will begin distributing funds to your creditors. If your plan isn’t confirmed, you can either file a modified plan or convert your case to a Chapter 7 bankruptcy, assuming you qualify under the Chapter 7 means test.
The judge may also choose to dismiss your case, in which case the court may authorize your trustee to keep some of the funds you’ve paid to cover their costs. The trustee will return any remaining funds that haven’t been disbursed to your creditors.
Complying with the plan
If the judge confirms your proposed repayment plan, it’s up to you to abide by the repayment schedule outlined in the plan. You must live within your budget, make regular payments to the trustee as required and not incur any new debt without consulting your trustee.
If you aren’t confident in your ability to make timely payments to the trustee on your own, you can make payments through payroll deductions. If you fail to make the agreed-upon payments, the court may dismiss your case or convert it to a Chapter 7 liquidation plan. The court can also dismiss your case if you fail to keep up with any required child support and alimony payments or fail to file your tax returns on time while your case is open.
If circumstances arise that make it impossible for you to continue making payments to the trustee, you may be able to ask the court to modify the plan or grant a “hardship discharge.” This option is generally only available if your failure to complete the repayment plan is due to circumstances beyond your control, if your creditors have received at least as much as they would have received in a Chapter 7 liquidation case, and if modification of the plan is not possible.
Pre-discharge debtor education course
Before the court will conclude your case and discharge any remaining eligible debts, you must complete a course on personal financial management. The goal of this course is to educate you on personal finance so you won’t be forced to seek bankruptcy relief in the future.
You can search for an approved debtor education provider in your area via the U.S. Department of Justice.
Once you’ve successfully concluded the three- or five-year repayment plan, any remaining eligible debts will be discharged. Your creditors may not take any legal action or try to collect on the debts once they’ve been discharged.
While the repayment plan you propose under a Chapter 13 petition typically runs for three to five years, Lee says there is a lot of planning that needs to be done prior to filing.
“That may take a month, or it may take one or two years,” Lee says.
This timeline is all the more reason to talk to an attorney as soon as you realize you’re facing financial troubles that could lead to bankruptcy.
Alternatives to Chapter 13 bankruptcy
Before filing for Chapter 13, you should think about your long-term goals and whether you can navigate your creditor problems without filing bankruptcy. Here are a few options you can explore.
With debt consolidation, you can roll all unsecured debts, such as credit cards, personal loans and medical bills, into one new loan with one monthly payment. In most cases, you’ll also negotiate lower interest rates or a reduced balance with your creditors so your payments are manageable.
Debt consolidation can still have an effect on your credit score because you aren’t paying your debts as agreed, but its impact is typically not as severe as declaring bankruptcy.
If one or two particular debts are the source of your financial troubles, you may be able to negotiate a settlement with the individual creditors rather than filing for bankruptcy.
You may have an easier time negotiating a settlement after your debt has been referred to a collection agency. Offer a realistic monthly payment plan or lump sum, and if the debt collector agrees to your settlement offer, make sure you get the agreement in writing before making any payments.
Watch out for companies that offer to negotiate with creditors on your behalf in exchange for a fee. Their fees can be quite expensive, and often the result is no better than you’d be able to negotiate on your own or with the help of your attorney.
“The caveat here is that a debt settlement program is not the same as Chapter 13,” Lee says. “In debt settlement, creditors are still able to use, get judgments, garnish wages and levy bank accounts. Chapter 13 stops all of those things from happening for the life of the bankruptcy.”
Liquidate your assets
If you have cash in the bank or own other assets that can be sold to pay off your debt, this may be a viable alternative to declaring bankruptcy. Take into account any potential consequences. If you tap your retirement account to pay down debt, for example, you may owe tax on the distribution as well as a 10% penalty for early withdrawals. You could pay off one debt, only to find yourself owing additional money to the IRS.
Seek debt counseling
You don’t have to file bankruptcy to consult with a debt counselor. Because debt counselors come at little to no cost, this can be a convenient way to learn how to manage your debt better without breaking the bank. Debt counseling agencies are often structured as nonprofits, and their counselors are certified to help you choose between several financial routes. They can help you sign up for a debt management plan, consolidate your debts and, yes, even file for bankruptcy if necessary.
Life after bankruptcy
After filing a Chapter 13 bankruptcy, your credit score will be lowered, possibly by hundreds of points. The bankruptcy will remain on your credit report for the next seven years.
But you can begin rebuilding your credit much sooner. Avoid applying for any new credit while you’re working through your repayment plan, but once your case is successfully discharged, you can apply for new forms of credit like personal loans and credit cards to build up your credit again. Use them responsibly and be sure to keep up with payments or pay off your balance each month.
Use the lessons learned in your debtor education course to live within your means, use credit wisely and pay your bills on time. Over time, your credit score will improve.
Chapter 13 bankruptcy: FAQ
How much do you pay back in Chapter 13?
When following your Chapter 13 bankruptcy payment plan, you’ll be required to make regular payments for three to five years, depending on your income. If you make on-time payments for the duration of your plan, the rest of your debt will be discharged at the end of the term. If you opt to pay your debts off early, you may be required to pay the entirety of the debt you claimed in your bankruptcy case and you’ll have to get permission from the court.
How long does Chapter 13 bankruptcy take?
The process of filing for Chapter 13 bankruptcy can last for several months. If you’re placed on a Chapter 13 payment plan, you’ll typically be paying off your debts for three to five years before the remainder is discharged. The length of your plan will depend on your monthly income. If your income is lower than the state median, you may be put on a three-year plan. If it is higher, you may be placed on a five-year plan.
When should you file for bankruptcy Chapter 13?
Chapter 13 bankruptcy may be a good route for those who are struggling to pay their bills and are taking funds from their retirement accounts to make ends meet. Bankruptcy may also be a wise option if you have a debt-to-income (DTI) ratio of 50% or more. Before filing for bankruptcy, take an in-depth look at your finances and consider other ways of paying off debt on low income.
What is a hardship discharge in Chapter 13 bankruptcy?
During your repayment period, situations may arise that prevent you from complying with the plan. For example, if injury or illness hinders your ability to work and earn enough income to honor your debts, you may qualify for a hardship discharge. To earn this type of discharge, three factors must be present:
- Your inability to complete the approved payment plan is due to circumstances beyond your control and through no fault of your own;
- Your creditors have received at least as much repayment as they would have collected under a Chapter 7 liquidation; and
- It is not possible to modify your Chapter 13 plan.
If a hardship discharge is granted, any dischargeable, nonpriority debt will be wiped out. However, like a Chapter 7 bankruptcy case, certain debts are not dischargeable, including student loans, tax debts or child support.