To begin a Chapter 13 bankruptcy, you fill out a packet of forms—mostly the same forms as you would use in a Chapter 7 bankruptcy—listing your income, property, expenses, and debts. You file these forms and paperwork with a nearby bankruptcy court. You must also file a workable payment plan proposing how you plan to handle your debts over the payment plan period.
You must also file your tax return for the previous year, proof that you've filed your tax returns for the last four years, and a certificate showing that you've completed credit counseling with an agency approved by the United States Trustee. (Learn more about the credit counseling requirement in bankruptcy.)
Under a Chapter 13 plan, you make payments, usually monthly, to the bankruptcy trustee, an official appointed by the bankruptcy court to oversee your case. (Find out more about the bankruptcy trustee.) The trustee, in turn, pays your creditors and collects a commission based on the amounts paid out under your plan. You must make all of your payments to complete your plan and get a discharge of any remaining balance on qualified debts.
Some creditors are entitled to receive 100% of what you owe them, while others will receive a much smaller percentage (or nothing at all). Typically, Chapter 13 bankruptcy plans must provide that:
Administrative claims will be paid 100%. These include:
Priority debts will be paid 100%. These include:
(Learn more about priority debts in Chapter 13 bankruptcy.)
Mortgage defaults will be paid 100% if you want to keep your house.
Other secured debt defaults will be paid 100% if you want to keep the property. Missed car payments fall into this category.
Unsecured debts will be paid anywhere from 0% to 100% of what you owe. The exact amount depends on:
More about unsecured debt below in “What Is an Unsecured Creditor?”
In your payment plan, you must commit to paying any leftover disposable income (the amount of your income that remains after subtracting certain allowed monthly expenses and payments on secured loans, such as a mortgage or car loan) towards your unsecured debts, such as credit card debts, medical bills, and student loans. (Learn more about devoting your disposable income to your Chapter 13 plan.)
The length of your payment plan depends on your income level. If your current monthly income (your average income over the six months before filing) exceeds the median monthly income for a household of your size in your state, your plan must last five years. If your income is less than the median, you can propose a three-year plan. (To find the median income figures for your state, go to the United States Trustee's website and click "Means Testing Information.")
Everyone who files for bankruptcy can protect the same amount of property using bankruptcy exemptions. Even so, if you file for Chapter 13 bankruptcy, you don't have to hand over any assets. But that doesn’t mean that you get to keep more property than someone who files for Chapter 7 bankruptcy. You still have to pay for it.
Here’s how your property gets treated in both Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 bankruptcy. In this chapter, you must surrender your nonexempt property to the trustee. The trustee will sell it and distribute the proceeds to your unsecured creditors (see below). You get to keep property that is exempt.
Chapter 13 bankruptcy. The trustee doesn’t sell property in a Chapter 13 case. Instead, in exchange for getting to keep your property, you’ll pay your unsecured creditors (more below) at least the value of your nonexempt property through your repayment plan.
What Is an Unsecured Creditor?
An unsecured creditor is the owner of an unsecured debt. Unlike a secured debt, an unsecured debt isn’t guaranteed by collateral that a creditor can take if you fail to pay your bill.
Examples of common types of unsecured debt include the following:
- major credit card and department store balances
- medical bills
- personal loans, such as payday loans
- utility bills, and
- club memberships.
If you don’t pay one of these debts, the unsecured creditor cannot force you to give up property—at least not without doing more. Most unsecured creditors must first file a lawsuit and win a judgment in court before taking adverse collection steps against you, such as garnishing your wages (taking money out of your paycheck each month) or executing a bank levy (forcing the bank to withdraw funds from your account). (The IRS and your student loan lender don’t need to get a judgment first—see priority unsecured creditors.) So, until you’re served with a lawsuit, you won’t need to worry about collection tactics other than harassing calls and letters—and filing for bankruptcy will wipe out most of these types of debts.
Priority unsecured creditors can use additional collection techniques. Past due income taxes (unless they’re old) and government-backed student loan obligations are unsecured debts, too, but special rules apply that allow these creditors to take steps against you without going to court. Child and spousal support obligations fall into this category, as well (creditors can use collection techniques allowed by the family court system). These types of unsecured creditors have “priority” claims that won’t go away in bankruptcy. In fact, you’ll need to pay off the entire balance of these debts in your Chapter 13 payment plan.
Be conscious of secured credit cards. Not all credit card accounts are unsecured. You’ll want to read your contract (or the back of the receipt) when purchasing jewelry, electronics, appliances, and furnishings on credit. By signing the credit contract, you’ll likely agree to give the creditor a security interest in the purchased property (purchase money loan). The creditor will be able to take back the property—such as your ring, computer, or even a mattress—if you’re delinquent on your payments. Even if you file for bankruptcy. Or, you can repay the debt in your Chapter 13 repayment plan and keep the item. You might even be able to pay less if you can cramdown the balance owed.
Find out how much property you can protect—and what you’ll have to pay for—by reviewing the bankruptcy exemptions for your state.
For everything you need to take charge of your debts, see Chapter 13 Bankruptcy: Keep Your Property & Repay Debts Over Time, by Stephen Elias and Patricia Dzikowski.
Find more articles and Q&As on what you must pay through your Chapter 13 plan.