An Overview of Chapter 13 Bankruptcy

In exchange for debt relief, Chapter 13 filers pay their discretionary income to creditors in a three- to five-year repayment plan.

By , Attorney · University of the Pacific McGeorge School of Law

Most people with debt problems would prefer to file for Chapter 7 bankruptcy and wipe out debt in four months without repaying creditors. But not everyone qualifies. Instead, people who have significant income or want to keep valuable property often turn to Chapter 13 bankruptcy for help.

In this article, you'll learn about:

  • the Chapter 13 bankruptcy process
  • qualifying for Chapter 13 bankruptcy
  • preparing a three- to five-year repayment plan, and
  • handling problems that might arise during your case.

Once you understand how Chapter 13 generally works, you'll likely want more specific information. You'll find additional resources for you at the end of the article.

Why File for Chapter 13 Bankruptcy?

People usually choose Chapter 13 bankruptcy because they make too much to pass the Chapter 7 means test, don't want to lose a house or car after falling behind on the monthly payment, or want to avoid wage garnishments and other collection tactics and repay support arrearages or recent tax debt over five years.

Other benefits that aren't available in Chapter 7 include eliminating junior mortgages on a residence using "lien stripping" and paying less on a car loan with a "cramdown."

The Chapter 13 Process

Here's a snapshot of what you'll do in Chapter 13 bankruptcy from start to finish. After reviewing the nine steps, you'll be ready to tackle the more challenging aspects of Chapter 13—eligibility and the specifics of the Chapter 13 plan.

1. Take Mandatory Credit Counseling Course

During the 180 days before filing for Chapter 13, complete a credit counseling course from an agency approved by the Department of Justice U.S. Trustee Program. The session helps evaluate whether you have sufficient income to repay your creditors.

Most providers charge between $25 and $35 for the course and provide counseling for free or at reduced rates if you can't afford to pay. However, Chapter 13 filers rarely qualify for the discount.

2. File Your Chapter 13 Bankruptcy Paperwork

The filing starts your bankruptcy case. Soon after, the court clerk will send a letter notifying you, the trustee appointed to your case, and your creditors of the automatic stay prohibiting collection activities. The notice will include creditor deadlines and the date and time of the 341 meeting of creditors—the hearing all filers must attend.

Expect to pay a bankruptcy filing fee when filing your bankruptcy paperwork and credit counseling certificate. You can use the Federal Court Finder to find your local bankruptcy court.

3. Attend the 341 meeting of creditors

At least five days before the hearing, you'll turn over "521 documents," including tax returns, paycheck stubs, bank statements, and possibly more, to the trustee. The trustee will check your identification and ask questions about your bankruptcy filing at the hearing. Creditors can also attend but rarely do.

4. Start Paying Your Chapter 13 Plan Payment

Your monthly Chapter 13 payments will begin the month after you file, even though the court won't have approved or "confirmed" your proposed Chapter 13 plan. The timing helps ensure your Chapter 13 bankruptcy case will end on schedule—usually in five years.

If the bankruptcy court doesn't confirm your plan, the trustee will refund your payments. However, don't expect to get car payments back—your car lender will credit your account.

5. Complete the Chapter 13 Confirmation Process

Your creditors and the bankruptcy trustee will have an opportunity to object to your proposed Chapter 13 repayment plan. If it happens, your attorney will likely try to make changes to everyone's satisfaction.

After considering any argument presented at the plan confirmation hearing, the judge must be able to answer the following questions affirmatively before confirming your plan:

  • Is the plan feasible? For instance, does the filer have enough income to pay the monthly payment?
  • Did the debtor propose the plan in good faith? Or is the filer trying to manipulate the bankruptcy process?
  • Does the plan comply with bankruptcy law? Is the filer paying creditors the amounts required by law?

Most judges give filers several opportunities to correct a deficient plan before dismissing a Chapter 13 case.

6. Complete the Confirmed Chapter 13 Plan

Before the court orders a debt discharge wiping out the remaining balance of your qualifying debts, you must make all payments, be current on child support and alimony obligations, and complete a second course—the debtor's education course.

After receiving the bankruptcy discharge, most filers are free of debt except for mortgages and student loans. Learn about debts that survive Chapter 13.

Are You Eligible for Chapter 13 Bankruptcy?

The following steps involve learning whether you're eligible, how much you'll pay, and the challenges you might face during your plan.

Debt limits. You can have only so much debt in Chapter 13 bankruptcy—you'll find the Chapter 13 bankruptcy debt limitations here. If your total debt burden is too high, you'll be ineligible, but you can file an individual Chapter 11 bankruptcy instead.

Income requirements. When you file a Chapter 13 bankruptcy, you must prove you can afford to pay your monthly household obligations and the monthly plan payment. The bankruptcy court won't "confirm" or approve your proposed Chapter 13 plan if you don't have any income or it's too low.

Person status. Only individuals and sole proprietors qualify for a Chapter 13 debt discharge—it isn't available to small businesses and companies. However, small business owners who file individually will include personally guaranteed business debts in the plan. And from a practical standpoint, a business owner's improved financial condition can benefit a small business indirectly, so Chapter 13 might be worth pursuing.

Can You Afford a Chapter 13 Repayment Plan?

This is the big question—can you afford a Chapter 13 payment? Many people can't. Even if you can, your Chapter 13 payment plan will stretch you to your financial limit even if you pay significantly less than what you owe.

Start by learning how long your plan will be, then calculate the total debt you need to repay. However, be warned—the rules are tricky, and you'll end up with a rough estimate at best. You and your attorney will use a software program to get an accurate figure before filing.

Your Chapter 13 Plan Length

Most filers pay into a five-year plan. People who qualify for Chapter 7 will have the option of a three-year plan but often go with the more extended plan—primarily because the lower monthly payment increases the likelihood that the court will confirm or approve it.

How Much You'll Pay in a Chapter 13 Plan

Here are the Chapter 13 payment rules. We recommend reviewing the rules and the examples in Filing for Bankruptcy in 2022.

To get a monthly figure, you'll add up what you must pay and divide the total by 36 or 60—the number of months in your repayment plan period.

  • Priority debt. Your Chapter 13 plan must pay "priority claims" in full, including child support, alimony arrearages, and recent tax obligations.
  • Secured debt. Debt guaranteed by collateral, such as your house or car, is "secured" debt. You must pay secured debt payments and arrearages to keep the property.
  • Unsecured debt. Your remaining debts fall into this category. The plan must apply your disposable income—the amount remaining after paying secured debt, priority debt, and allowed living expenses—toward unsecured debt, such as credit card balances and medical bills.
  • Trustee fee. You'll pay an additional ten percent to compensate the Chapter 13 trustee. Learn about the trustee's fee and how it can increase your payment significantly.

Your last step? Consider the "best efforts" or "best interests of creditors" test. This rule requires you to pay to keep property you can't protect with a bankruptcy exemption.

To find this figure, you'll inventory your property, review your state's bankruptcy exemptions, and determine how much "nonexempt property" you have (property that isn't protected with a bankruptcy exemption). Compare the total value of your nonexempt property to your disposable income. You'll pay the larger amount in your plan.

The rule ensures that Chapter 13 creditors receive at least as much or more as they would if the debtor had filed for Chapter 7. Learn more about debts you'll repay in Chapter 13 bankruptcy and the Chapter 13 repayment plan.

If You Can't Pay Your Chapter 13 Plan Payment

If your income decreases during your repayment period—which happens more frequently than one would think—it won't necessarily be the end of your Chapter 13 case. Here are the options available when you can't complete your current Chapter 13 plan.

Modify your payment. The court can reduce the disposable income amount you're paying toward nonpriority unsecured debts like credit card balances, medical bills, and personal loans. But that's it unless you're willing to sell property and pay the proceeds to your creditors to reduce your obligation under the "best efforts" rule.

Ask for a Chapter 13 hardship discharge. If you lose your job because a plant closes in a one-factory town or suffer a debilitating illness, you might qualify for a hardship discharge. The problem here? A hardship discharge often isn't available until you're deep into your plan because you must pay the amount required by the best efforts rule.

Consider converting or "switching" to Chapter 7 bankruptcy. The downside? You'll likely lose any nonexempt property you haven't yet paid to keep. Again, the best efforts rule is at work. Unsecured creditors must get at least an amount equal to the value of your nonexempt property. Otherwise, the Chapter 7 trustee will sell the nonexempt property and pay unsecured creditors.

Dismiss your Chapter 13 bankruptcy case. You'll still owe any outstanding debt balances, plus the interest creditors didn't charge during your Chapter 13 case.

Talk With a Chapter 13 Bankruptcy Lawyer

Chapter 13 cases are challenging to navigate. Although it's possible to file your own Chapter 13 case, it's rarely successful, and most courts encourage filers to retain a bankruptcy lawyer in Chapter 13.

Need More Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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