An Overview of Chapter 13 Bankruptcy

If you're struggling with overwhelming debt but have a steady income, Chapter 13 bankruptcy can help you manage your debts—and you don't need to worry about losing your home, car, and other property. Chapter 13 will reorganize your finances and give you time to repay creditors—often significantly less than you owe—and you keep everything you own.

This guide will walk you through the Chapter 13 process step-by-step, explaining everything you need to know, from qualifications, the debts you must pay, how to save your home and car, and what debts you can eliminate or "discharge." It even addresses complicated topics, like removing liens (lien stripping) and reducing the balance on vehicle loans (cramdowns). If this article doesn't fully explain a topic, we provide a link to a more detailed article, ensuring you can find the information you need and take a step closer to achieving a financial fresh start.

Is Chapter 7 or 13 the Right Choice for You?

If you're like most people, you'd probably prefer to file for Chapter 7 because it wipes out debts quickly, and you don't have to repay anything. However, not everyone qualifies for Chapter 7, and sometimes Chapter 7 doesn't offer the type of relief you need.

What Is Chapter 13 Bankruptcy?

It's a bankruptcy chapter for income-earning individuals who have some "disposable income" remaining after paying monthly living expenses that can be used to repay creditors. In Chapter 13, the filer's disposable income is divided among creditors for three to five years according to a court-approved plan. While making plan payments, creditors can't bother them with wage garnishments, lawsuits, and other collection actions.

Chapter 13 will likely be the better option over Chapter 7 if:

• You don't qualify for Chapter 7. The Chapter 7 "means test" calculation determines whether you have enough income to repay some of your unsecured debts in Chapter 13. If the test shows you can afford to repay a portion of your debts, you'll need to consider Chapter 13.
• You want to keep valuable property. Chapter 7 filers lose any property not covered by a bankruptcy exemption. If you have a home, car, or other property that isn't covered, you can keep it in Chapter 13 by paying for the "nonexempt" portion through your plan over time.
• You're behind on secured debts. You can stop a home foreclosure or a vehicle repossession and keep the property by catching up on missed payments through the plan.
• You have nondischargeable debts. If you have debts that aren't dischargeable, such as tax debts or domestic support obligations, you can repay them in the Chapter 13 plan.

Pros and Cons of Chapters 7 and 13

This short list contains only the most common factors. Below is a table comparing Chapter 13 and Chapter 7 bankruptcy to help you determine which would be best for you.

How Can Chapter 13 Help You?

In both chapters, the "automatic stay" goes into effect as soon as you file, giving you breathing room from collection actions. However, because Chapter 13 takes longer to complete, it offers benefits not available in Chapter 7.

Save Your Home From Foreclosure

If you've fallen behind on your mortgage payments, Chapter 13 allows you to catch up on the missed payments through the repayment plan while continuing to make your regular monthly mortgage payments. Sometimes, you can even eliminate junior mortgages and home equity loans (more below).

Example. Ann and John stopped paying their mortgage payments due to an extended illness, and the lender started the foreclosure process. They don't have the funds to bring the mortgage current; however, they have a steady income and file for Chapter 13 bankruptcy. The automatic stay stops the foreclosure, and they propose a Chapter 13 plan to pay the monthly payment, plus an additional amount each month for the arrearages. The plan allows them to catch up over time and save the home from foreclosure.

Learn about the requirements for retaining a home in Chapter 7 and Chapter 13 bankruptcy.

Keep Your Car

If you're behind on car payments, you can use the Chapter 13 plan to catch up on the missed payments and keep your car in Chapter 13.

Repay Priority Debts Over Time

Certain debts, like recent income tax debts and child support or alimony arrearages, are considered "priority debts" and can't be discharged. They also must be paid in full before other unsecured debts receive payment. Chapter 13 allows you to pay these off over time through your repayment plan, preventing collection actions like wage garnishments and property seizures.

"Lien Stripping" for Junior Mortgages

Chapter 13 is sometimes called the "super discharge" because it discharges more debts than Chapter 7.

If you have a second or third mortgage on your home, and the value of your home is less than what you owe on your first mortgage, Chapter 13 might allow you to "strip off" the junior liens and home equity loans. The mortgages are reclassified to unsecured debt and paid a percentage of your disposable income, along with credit card debt, medical bills, and personal loans. The reclassification also allows you to discharge the remaining balance at the end of the case, which eliminates it, likely after paying far less than you owed.

Example. Sarah's home is worth $180,000. She owes $200,000 on the first mortgage and $20,000 on a home equity line of credit (HELOC) for a total debt of $220,000. In Chapter 13, Sarah can "strip off" the HELOC lien because the home's value ($180,000) is less than the balance of the first mortgage ($200,000), leaving nothing to repay the HELOC. The bankruptcy court will reclassify the HELOC from secured to unsecured, which will allow Sarah to pay less than her regular monthly payment. She also isn't required to repay any arrearages. After completing her plan, the court will discharge the HELOC, and because the court removed the lien, the lender will have no rights to her home.

"Cramdowns" for Car Loans and Rental Property

For certain car loans, Chapter 13 allows you to reduce the principal balance of the loan to the car or rental property's market value and often lower the interest rate, resulting in a lower monthly payment. However, this option is usually only available for cars if you bought the car more than 910 days before filing. It also isn't available for your personal residence, and you must repay the entire cramdown balance in the Chapter 13 plan, which can make using it on rental property difficult.

Example. Two years ago, Jeff financed a $20,000 car. Today, he owes $18,000, but it's only worth $12,000, and he can no longer afford the monthly payment. Because he also has significant credit card debt, he meets with a bankruptcy lawyer, who suggests two options. Jeff could discharge all debt in Chapter 7 without payment, but he'd need to surrender the car. Alternatively, in Chapter 13, he could cram down the car loan to its current market value of $12,000 and pay it off over five years at a lower interest rate, thereby emerging from Chapter 13 debt-free and owning his car. He chose to file for Chapter 13.

Protect a Codebtor

If you're struggling financially, contact your bankruptcy lawyer immediately.

If you file for Chapter 7, you can wipe out a debt you jointly owe with someone else (a codebtor). However, because the Chapter 7 discharge applies only to you, the creditor can continue to collect against the codebtor, and they'll be required to repay it themselves. By contrast, your codebtor is protected from collections while you're in Chapter 13.

Continue Operating a Sole Proprietorship

If you have a sole proprietorship business that you would have to close down in a Chapter 7 bankruptcy—likely because it requires business equipment that you can't exempt—you could continue to operate in Chapter 13.

Example. Erin is a graphic designer who operates as a sole proprietorship. She relies on expensive design software and computer equipment that her state's bankruptcy exemptions don't protect. She can't file for Chapter 7 because the trustee would sell her equipment, which would ultimately close her business. However, she learns that she can keep the equipment in Chapter 13 if she pays its value to creditors. Because she can spread the payments over five years and discharge a significant amount of debt, she decides it's best to choose Chapter 13, as this allows her to continue earning a living and emerge from the debt free.

The Chapter 13 Bankruptcy Process: Your Step-by-Step Journey

Because many parts of Chapter 13 are complicated, it can help to familiarize yourself with the overall picture first. Here's a start-to-finish snapshot of the Chapter 13 process.

Step 1. Evaluate your eligibility.

Once you familiarize yourself with the process, you'll likely want to meet with a bankruptcy lawyer who can review your case, advise you of your options, and check that you meet financial requirements. If it's a go, you'll start preparing to file.

Tip. You must reside in the jurisdiction you file in for at least 180 days. If you've recently moved from another state, you might also need to use the previous state's bankruptcy exemptions. Learn more about filing for bankruptcy after moving to a new state. (28 U.S.C. § 1408; 11 U.S.C. § 522(b)(3)(A).)

Step 2. Gather documents and get credit counseling.

Before filing, you'll need copies of the financial documents necessary to complete the Chapter 13 bankruptcy forms. You'll also take a credit counseling course and attach the completion certificate to the petition. The list of approved agencies is on the U.S. Trustee Program website. Plan on paying a filing fee, which sometimes can be paid in installments.

Tip. If you don't have your Social Security card or photo ID, order one because receiving it takes time. You'll need it or another form of proof allowed by the trustee to prove your identity.

Step 3. File your Chapter 13 bankruptcy paperwork.

The filing starts the case and puts the automatic stay into effect. The court notifies your creditors of the bankruptcy, the date for the 341 meeting of creditors—the hearing all filers must attend—and deadlines for filing payment claims.

Step 4. Forward the required financial documents to the trustee.

You'll do this at least a week before the 341 meeting of creditors. The trustee uses the financial documents to verify the information provided in the petition (in a few jurisdictions, you'll file them with the court). At a minimum, you'll submit banking, investment, and retirement statements (showing current balances and recent transactions), four years of tax returns, paycheck stubs, and, if you own a business, profit and loss statements.

Tip. To save time and avoid delays, check the trustee's website for a list of documents and provide them early. If the trustee has additional requests, you might be able to satisfy them before the 341 meeting and avoid a continuation.

Step 5. Start paying your Chapter 13 plan payment.

Because Chapter 13 cases can't continue longer than five years, you'll start making your proposed Chapter 13 payment within 30 days of filing the case, which will be before the judge approves your plan at the "confirmation" hearing. If your plan isn't confirmed, the trustee returns the payments, minus any amounts they're required to send to the lender (like vehicle payments) and fees.

Step 6. Attend the 341 meeting of creditors.

The meeting takes place either in person or virtually about a month after filing. The trustee will ask questions about your financial situation, including your assets, income, expenses, and debts, and ask you to clarify any points of confusion. Creditors can also appear and ask questions, but rarely do.

What happens after the 341 meeting will depend on your particular case. The trustee and creditors can object to your plan for various reasons. Perhaps more funds in your expense budget should be used to pay creditors, or some other issue is depriving creditors of proper payment, such as using the incorrect interest rate. It's common for the trustee to discuss the issues informally at the meeting of creditors. If you don't agree to amend your plan, a formal objection will be filed for the judge's consideration.

Step 7. Attend the Chapter 13 confirmation hearing.

At the confirmation hearing, the judge considers any written objections and oral argument against your proposed Chapter 13 plan before determining whether you can afford the payment and the plan is feasible. Learn about your obligations under the Chapter 13 plan.

Step 8. Complete the confirmed Chapter 13 plan.

Once confirmed, you'll make the plan payments to the trustee for either three or five years. The trustee forwards the funds to creditors and deletes a portion (up to 10%) for the trustee's fee. Once you complete the plan, the court will issue a "discharge order" that erases any remaining balances on qualifying debts. Before receiving the discharge, you'll take the debtor education course and file the certificate. Your court might also require additional paperwork, such as verification of your current domestic support obligations.

Most people don't leave Chapter 13 owing anything other than their mortgage payment and student loans, with a few unusual exceptions (although if you owed more than five years on your car payment when you filed and kept the car, you might still have a vehicle payment).

Do You Qualify for Chapter 13 Bankruptcy?

Making too much to qualify for Chapter 7 doesn't automatically qualify you for Chapter 13. Here's how to make sure Chapter 13 is an option for you.

Have You Filed Before?

You're only entitled to a bankruptcy discharge every so often, so if you've filed in the past, you might need to wait to be eligible for another. The chapter filed previously also comes into play when you've filed multiple bankruptcies.

Chapter 13 Debt Limits: How Much Debt Is Too Much?

You can't owe more than $1,580,125 of secured debt, which would include your mortgages and car loans. You're also limited to $526,700 of unsecured debt, like credit card balances, medical bills, and personal loans. If your debt exceeds these limits, you can consider Chapter 11. While used predominantly by businesses, individuals can also file, although it's a more costly process.

The Chapter 13 debt limits adjust periodically and are valid for cases filed between April 1, 2025, and March 31, 2028. (11 U.S.C. § 109(e); the Federal Register publishes current amounts, or check the U.S. Courts Chapter 13 webpage).

Chapter 13 Income Requirements: Can You Afford the Payments?

To meet the "feasibility" test, you must earn enough to be able to afford the plan payments. The court will compare your total income to your reasonable and necessary living expenses to determine your "disposable income," which is the amount you're required to pay unsecured creditors throughout the plan.

If you can't meet your monthly expenses or don't have any disposable income, you won't qualify for Chapter 13. However, you'll likely be eligible for Chapter 7. The downside? If you have property not covered by an exemption, the Chapter 7 trustee will sell it.

Tip. Some courts allow a "zero-percent" Chapter 13 plan that lets you catch up on a mortgage or car payment over time while paying nothing to other creditors. Talk to a local bankruptcy lawyer about the availability of this option.

Who Can File for Chapter 13? Individual and Sole Proprietor Status

Chapter 13 bankruptcy is specifically for individuals and sole proprietors. It isn't available to corporations, partnerships, or limited liability companies.

Tip. Other small business owners can file Chapter 13 individually and include personal guarantees for business debt in the plan. However, even though Chapter 13 can address the individual's obligation, the business will remain responsible for the underlying debt. Also, feasibility can be a challenge because filers must protect the value of their ownership interest with an exemption or be able to pay creditors an equivalent amount. But it can be a helpful strategy in the right circumstances.

Can You Afford a Chapter 13 Repayment Plan?

Although it's possible to "pay pennies on the dollar," Chapter 13 payments can be expensive. Here's how to estimate the amount you'd be required to pay—just keep in mind that calculating the exact amount is tricky without bankruptcy software.

The Required Chapter 13 Plan Length

A Chapter 13 repayment plan is for either three or five years. If your gross income is below your state's median income for the size of your family, you can propose a three-year plan. If it's above, you must propose a five-year plan (unless you're fully repaying all unsecured debts). You'll find median income limits on the U.S. Trustee Program website. Select "Consumers" and "Means Test Information."

If you qualify for a three-year plan but the payment is too high, you can spread out the payment over five years. This approach can make using Chapter 13 more affordable and, most importantly, feasible.

Calculating Your Chapter 13 Payments

Although calculating your exact Chapter 13 monthly payment is complex and requires the help of a bankruptcy lawyer, we can break down the payment components. Familiarizing yourself with these debt types will help you estimate the total payment needed.

• Priority debts. Bankruptcy law has assessed "priority claim" status on debts deemed more critical than others. For instance, your plan must fully pay child support and alimony arrearages, as well as recent tax debts (generally those less than three years old).
• Secured debts. These debts have a lien attached to collateral or property. For instance, your mortgage is a secured debt. It's secured by a lien on your house, just as your car loan includes a lien on the vehicle. If you don't pay as agreed, the lender uses the lien to seize the property. Therefore, to keep the property, you must bring the loan current by paying all past due amounts over the life of the plan (and continue to pay the monthly payment, although you might be able to use "lien stripping" or "cramdown" procedures to decrease the amount owed on these loans).
• Unsecured debts. These debts aren't tied to specific property and include debt like major credit card balances, medical bills, and personal loans (although department store credit purchases for jewelry, electronics, and furniture are often secured debts). How much you'll pay toward unsecured debts is primarily determined by your "disposable income" and the "best efforts" rule explained below. You must use all of your disposable income toward unsecured debts during the plan. The court discharges the balance remaining on qualifying unsecured debts (which for most people would be everything other than student loans) at the end of the plan.
• Trustee fees. The Chapter 13 trustee, who administers your case and distributes payments to creditors, is entitled to a fee. This fee is calculated as a percentage of the payments made through your plan and is added to your monthly payment amount.

The "Best Efforts" Rule and Nonexempt Property

The "best efforts" rule requires you to pay creditors at least as much as you would have had you filed for Chapter 7. To satisfy the "best efforts" rule, you'll calculate the value of your nonexempt property, minus sales costs. You must pay at least that amount to your unsecured creditors through your Chapter 13 plan. For example, suppose you have a rare, nonexempt coin collection valued at $5,000. Your unsecured creditors must receive at least $5,000 (minus liquidation costs) through your plan payments.

Tip. If your disposable income isn't equal to or more than the amount you must pay under the best efforts rule, your plan won't be feasible.

What If You Can't Pay Your Chapter 13 Plan?

Chapter 13 plans take a long time to complete, and life often gets messy. If your income decreases or you face unexpected expenses, there are ways to keep your case on track.

Contact Your Lawyer

If you're struggling financially, contact your bankruptcy lawyer immediately. They'll explain the options, such as coordinating a brief break with the trustee, modifying your plan, converting to Chapter 7, or dismissing the case. Ignoring the problem will lead to the trustee filing a motion to dismiss your case.

Modifying Your Chapter 13 Payment

A modification of your plan payments involves filing a motion with the court and demonstrating a material change in your circumstances. The court can sometimes reduce payments towards nonpriority unsecured debts, but not the amount paid toward priority debts or secured debts (unless you want to let go of the home, car, or other secured property).

Tip. If the best efforts rule requires you to pay more than you can afford, you could sell some of the nonexempt property, use the proceeds to pay down the plan, and reduce your payment.

Converting to Chapter 7 Bankruptcy

Converting your case to Chapter 7 can be a good option if your income has decreased because you're likely to qualify, and you can quickly eliminate qualifying debt in a bankruptcy discharge. But it works best if you don't own much nonexempt property because you could lose property in Chapter 7 that you were able to keep in Chapter 13. The Chapter 7 trustee will review your assets and sell those not protected by bankruptcy exemptions.

Dismissing Your Chapter 13 Case

Sometimes bankruptcy isn't a good option any longer. You have the right to ask the court to dismiss the case, or you can stop payments and wait for the court to dismiss it after the trustee files a motion. A dismissal essentially stops the bankruptcy process.

However, once dismissed, creditors can resume collection efforts, including lawsuits, wage garnishments, and foreclosures. Also, interest will be recalculated and included in the new balance, although you'll get credit for the amounts paid. Also, dismissing a bankruptcy can affect your rights if you choose to file again.

What Debts Can You Discharge in Chapter 13 Bankruptcy?

In addition to keeping property, you're filing Chapter 13 for a debt discharge, releasing you from personal liability so creditors can't collect any longer. While you can discharge many types of debts, there are some exceptions.

Dischargeable and Nondischargeable Debts

In bankruptcy, debts are either "dischargeable" and can be eliminated or "nondischargeable" and can't be eliminated. The bankruptcy code explains "the exceptions to discharge" in 11 U.S.C. § 523. Everything else is dischargeable.

Nondischargeable debts include:

• domestic support obligations like child support and alimony
• student loans unless you win a lawsuit establishing it would be an undue burden to force you to pay
• recently incurred income tax debts
• debts incurred through fraud or misrepresentation
• debts for willful and malicious injury to another person or their property, and
• fines and penalties owed to government agencies.

Dischargeable debts typically include:

• credit card debt
• medical bills
• personal loans
• deficiency balances on repossessed vehicles
• some older tax debts (generally those more than three years old and for which a return was filed)
• lease obligations, and
• collection lawsuits.

Learn more about the differences between dischargeable and nondischargable debts in bankruptcy.

The Chapter 13 "Super Discharge"

Chapter 13 is sometimes called the "super discharge" because it discharges more debts than Chapter 7. Examples include debts for willful and malicious injury to property (but not to a person), debts incurred from a divorce decree that aren't domestic support obligations, and tax debts charged on a credit card.

For example, suppose that as part of a marital dissolution, one spouse wants to keep the couple's flower farm, "The Bloomstead," and agrees to pay the other spouse for it over time. This agreement creates a debt between the two spouses. The spouse owing the debt can file for Chapter 13 and discharge the remaining balance on The Bloomstead at the end of the case, even if they only paid a minor amount on it through the plan.

There are a couple of reasons this would be possible.

• In this example, the creditor spouse wasn't given a lien against the property, so the debt was unsecured. A properly filed lien would have protected the creditor spouse's payment rights.
• The debt wasn't a domestic support obligation, such as alimony or child support, but rather property division, which, unlike Chapter 7, can be discharged in Chapter 13.

Chapter 7's discharge won't eliminate debts arising from a marital settlement agreement.

Your Chapter 13 Questions Answered

Answers to common questions about Chapter 13 bankruptcy.

Do I need to include all my debts in a Chapter 13 plan?

You must list all debts in your bankruptcy case, but you won't pay them all through the plan. Generally, rent and lease payments, monthly household expenses, and mortgage and car payments aren't paid through the plan. However, some jurisdictions require these debts to be paid through the plan if you're behind on the payments when you file.

Will I lose my property in Chapter 13 bankruptcy?

The Chapter 13 trustee doesn't sell property. You keep your assets, including your home and car, but you must earn enough to pay the monthly payments and any arrearages. You must also pay creditors an amount equal to any nonexempt property you own.

What is "disposable income"?

Disposable income is the amount of income you have left after paying for your reasonable and necessary living expenses and payments to priority and secured debts. This income is used to pay your unsecured creditors through your Chapter 13 plan.

What is the "best efforts" rule?

This rule requires that your Chapter 13 plan must propose to pay unsecured creditors at least as much as they would receive if you filed for Chapter 7 bankruptcy. This amount is often based on the value of your nonexempt property.

Can I modify my Chapter 13 plan if my financial situation changes?

Yes, if you suffer a significant change in your circumstances, you might be able to request a modification of your plan payments by filing a motion with the court.

What happens if I can't make my Chapter 13 payments?

If you can't make your payments, you have several options, including modifying your plan, seeking a hardship discharge, converting to Chapter 7 bankruptcy, or having your case dismissed.

Do I need a lawyer to file for Chapter 13 bankruptcy?

While it is possible to file on your own, Chapter 13 cases are very complex. Hiring a bankruptcy lawyer is highly recommended to navigate the process correctly and increase your chances of success.

Do You Need a Bankruptcy Lawyer?

Bankruptcy courts often encourage debtors to hire a bankruptcy lawyer in Chapter 13 cases precisely because of their complexity. A lawyer who specializes in bankruptcy law can provide invaluable assistance throughout the entire process. Here's what you should expect from your bankruptcy lawyer:

• Expert knowledge. A bankruptcy lawyer understands bankruptcy law, local court rules, and trustee practices. They can assess your financial situation, determine if Chapter 13 is the right option for you, and explain how the process will work in your specific case.
• Accurate paperwork and plan development. A lawyer will ensure that forms are completed accurately and supported by proper documentation, increasing the likelihood of your plan being confirmed. Calculating plan payments is complicated without the assistance of computer software, which is expensive and generally requires bankruptcy knowledge to complete correctly.
• Navigating challenges. The Chapter 13 process is lengthy, and having someone in your corner throughout your case is essential. A lawyer will represent you in court, respond to motions and litigation, and help you with plan modifications or converting to Chapter 7 if needed.

Overall, having a bankruptcy lawyer in your court can increase your chances of success by helping you avoid pitfalls, ultimately saving you time and reducing stress.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? We wholeheartedly encourage research and learning, and you can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. These resources can explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Additionally, information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.