An Overview of Chapter 13 Bankruptcy

Here's how Chapter 13 bankruptcy works.

When debts become overwhelming, many people seek one of two types of bankruptcy for relief, depending on their income and needs. For instance, people with little income remaining at the end of each month and minimal assets usually choose to file for Chapter 7 bankruptcy, the chapter that wipes out (discharges) qualifying debt in four to six months without the need to repay creditors.

By contrast, people who earn a significant income or who want to protect valuable property will file for Chapter 13 bankruptcy. In exchange for debt relief, these filers pay their discretionary income to their creditors over the course of a three- to five-year repayment plan. In this article, you’ll learn about how the overall Chapter 13 process works.

Chapter 13 Eligibility

Chapter 13 bankruptcy isn't for everyone. Here are a few requirements you should know upfront.

  • Debt limits. Secured debts and unsecured debts cannot exceed certain amounts. (Find the figures in What Are Chapter 13 Bankruptcy Debt Limitations?) A "secured debt" gives a creditor the right to take property (such as your house or car) if you don't pay the debt. An "unsecured debt" (such as a credit card or medical bill) doesn't give the creditor this right. If your total debt burden is too high, you’ll be ineligible, but you can file an individual Chapter 11 bankruptcy, instead.
  • Steady income. When you file a Chapter 13 case, you’ll have to prove to the court that you can afford to meet both your monthly household obligations and pay into a repayment plan. If your income is irregular or too low, the court won’t confirm (approve) your proposed repayment plan (more below).
  • Not a business. This chapter isn’t available to companies, meaning that only an individual can file for Chapter 13 bankruptcy. However, business-related debts that you’re personally responsible for will be part of your plan, and therefore, from a practical standpoint, a sole proprietorship might be able to benefit from this chapter.

(For details, see Do You Qualify for Chapter 13 Bankruptcy?)

The Chapter 13 Process

Filing and completing a Chapter 13 bankruptcy case is far more complicated than Chapter 7 bankruptcy. Here’s a snapshot of the process.

Mandatory Courses and Filing Fees

When you file your official bankruptcy forms with the court clerk, you’ll pay a bankruptcy filing fee and present a certificate demonstrating that you received the mandatory credit counseling education from an agency approved by the United States Trustee's office. The session helps evaluate whether you have sufficient income to repay your creditors. You’ll take a second “debtor education” course after filing your case.

You should expect to pay a fee of between $25 and $35 per course because while providers must provide counseling for free or at reduced rates if you cannot afford to pay, Chapter 13 filers rarely qualify for the discount. You’ll find a list of approved credit counseling and debtor education agencies on the U.S. Trustee's website.

The Chapter 13 Repayment Plan

The central part of your Chapter 13 case is the repayment plan that you’ll propose to your creditors and the court. Amongst other things, the plan must take into account each of your debts. You’ll use either the official plan form or your court’s local form, depending on where you file.

Your creditors and the bankruptcy trustee will have an opportunity to object to your plan. If you’re able to make changes to everyone’s satisfaction, the court will likely approve (confirm) your plan at the confirmation hearing. You won’t wait until plan confirmation to start paying your monthly payment, however. Your payments will begin the month after you file.

The Confirmation Process

The various bankruptcy chapters provide a filer with two types of bankruptcy relief: liquidation and reorganization. In a Chapter 7 bankruptcy, the bankruptcy trustee—the official tasked with overseeing the case—will sell nonexempt property (property that the debtor can’t keep) and distribute it to creditors.

By contrast, in a Chapter 11 or Chapter 13 reorganization, the trustee doesn’t sell the debtor’s property. Instead, the debtor must develop a plan to repay creditors over a period of time. Most plans will include provisions that allow the debtor to pay creditors less than the amount owed.

Before the plan goes into effect, the bankruptcy court must approve or “confirm” it at a confirmation hearing. Creditors will have an opportunity to object to the plan beforehand.

If there are no objections, the judge will confirm the plan if it meets the following elements:

  • the plan is feasible (for instance, the debtor has enough income to pay the creditors as provided)
  • the debtor proposed the plan in good faith (the debtor isn’t trying to manipulate the bankruptcy process), and
  • the plan complies with bankruptcy law.

After confirmation in a Chapter 13 case, the debtor must complete the three- to five-year repayment plan before any debts get wiped out. By contrast, discharge of debt is immediate after a Chapter 11 confirmation. The confirmation creates new contracts between the debtor and creditors.

Both Chapter 11 and Chapter 13 cases can be difficult to complete successfully. Debtors in Chapter 11 cases must be represented by an attorney. Although it’s possible to represent yourself in a Chapter 13 case, doing so is rarely successful, and most courts encourage filers to retain counsel.

Here are some examples of debts you’ll repay in Chapter 13 bankruptcy.

  • Priority debt. Your Chapter 13 plan must pay certain debts—called priority claims—in full. Priority claims include child support and alimony arrearages, and most tax obligations.
  • Secured debt. If you want to keep a car or house, you’ll have to continue to pay your regular payment on the car loan or mortgage. Whether you’ll have to pay these amounts as part of your plan will depend on your local court. If you’re behind on payments, you’ll have to repay the arrearages in your plan.
  • Unsecured debt. The plan must apply your disposable income (the amount remaining after paying secured and priority debt, as well as allowed living expenses) toward unsecured debts, such as credit card balances and medical bills. You don't have to fully repay these debts, or even pay them at all, in some cases. You just must show that you are putting any remaining income towards their repayment.
  • Value of nonexempt property. You’re allowed to keep all of your property in a Chapter 13 bankruptcy if you can afford to do so. You’ll have to pay the value of any property that you can’t protect with an exemption through your plan.

Although the repayment length will depend on how much you earn, most filers will have a five-year plan. The only exception is that a three-year plan is available to people who qualify to file a Chapter 7 case but choose to file a Chapter 13 bankruptcy instead—perhaps to save a house or car, or to pay off a priority debt, such as child support arrearages or taxes. Even so, because the monthly payment will often be significantly lower over five years, it’s common for filers to opt for the more extended plan—primarily because it increases the likelihood that the court will confirm the plan.

(For more on repayment plans, see The Chapter 13 Repayment Plan.)

If You Can't Make Plan Payments

A lot of financial changes can occur over the course of your plan. But that doesn’t mean you’re out of the plan automatically.

If, for example, your income decreases, you might be able to modify the amount being paid to your unsecured creditors. If, however, you can’t pay a required debt, the court might let you discharge your debts due to hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness.

If neither options are feasible, you might be able to convert (switch) to a Chapter 7 bankruptcy. Keep in mind, however, that there’s a good chance that you’d lose your nonexempt property. The other option is to dismiss your Chapter 13 bankruptcy case. The downside to this approach is that you would still owe your outstanding debt balance, plus any interest creditors didn’t charge during your Chapter 13 case.

(Learn more about your options if you can't complete your Chapter 13 plan.)

How a Chapter 13 Case Ends

After completing your repayment plan, you must show the court that you are current on your child support and alimony obligations and that you have completed the budget counseling course mentioned above. If you meet all requirements, the remaining balance on qualifying dischargeable debt gets wiped out. You should be debt free except for a mortgage or student loan if you have one.

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