What Is Chapter 13 Bankruptcy?
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Chapter 13 bankruptcy can help provide debt relief for folks who make too much money to qualify for Chapter 7. At its core, it reorganizes your debt to allow you to pay back as much as you can handle over a 3–5-year payment plan. After you make all your plan payments and meet all the other requirements, the bankruptcy court will enter a discharge, which wipes out your remaining eligible debt.
Written by Attorney Andrea Wimmer.
Updated October 15, 2024
What Is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy — also known as reorganization bankruptcy — is a legal process that helps people reorganize their debts and pay them off over time. If you're struggling to keep up with bills but still have a steady income, Chapter 13 might be a good option for you. Unlike Chapter 7 bankruptcy, which sometimes requires you to sell certain property to pay off debts, Chapter 13 lets you keep your property while you catch up on missed payments.
Here’s how it works: You’ll propose a repayment plan to the bankruptcy court. Plans typically last 3–5 years. During this time, you'll make monthly payments to a court-appointed bankruptcy trustee, who then distributes the money to your creditors and lenders. The amount you pay depends on how much you owe, your income, and what you can reasonably afford.
Chapter 13 can be especially helpful if you're behind on your mortgage payments or car loan. It gives you time to catch up on those missed payments without worrying about losing your home or vehicle, as long as you stick to the plan. At the end of the repayment period, any remaining eligible debt is wiped out, giving you a fresh start.
What Are the Steps To File Chapter 13?
Filing bankruptcy requires several steps. Here’s a very basic overview of the Chapter 13 filing process:
Take the credit counseling course: Complete a required credit counseling course from an approved provider.
Prepare and file your forms: Submit the necessary bankruptcy forms, including a detailed repayment plan, to the court.
Attend the meeting of creditors: Attend the 341 meeting with the bankruptcy trustee and your creditors to review your plan.
Attend the plan confirmation hearing: The court will review and confirm your repayment plan, possibly after resolving creditor objections.
Make payments: Start making monthly payments to the trustee according to your plan.
Complete a financial management course: Take and submit proof of a post-filing financial management course.
Receive your bankruptcy discharge: After completing your repayment plan, eligible debts will be discharged.
These are the basic steps to file and complete a Chapter 13 bankruptcy. To learn more, read our comprehensive step-by-step guide.
What Are the Advantages of Filing Chapter 13 Bankruptcy?
A key advantage to filing any form of bankruptcy is the automatic stay. Once you’ve filed your bankruptcy petition, the automatic stay goes into effect and stops all collection efforts from debt collectors, including wage garnishment and car repossession. More specifically, Chapter 13 offers some key advantages over Chapter 7 if you have a steady income. Chapter 13 allows you to…
Modify your car loan: You can lower your car loan’s interest rate and, in some cases, reduce the loan balance to the car’s current value.
Catch up on your mortgage: Chapter 13 allows you to catch up on missed mortgage or HOA payments over 3–5 years, helping you avoid foreclosure.
Eliminate a second mortgage or HELOC: If your home is worth less than your first mortgage, you can remove your second mortgage or HELOC through Chapter 13.
Keep non-exempt property: Unlike Chapter 7, you can keep non-exempt property by paying its value through your repayment plan.
Protect co-signers: Chapter 13 extends the automatic stay to co-signers, protecting them from creditors as long as you stick to your payment plan.
Pay off priority debts: You can pay off non-dischargeable debts like child support, alimony, or certain taxes through the repayment plan.
If you want to catch up on secured debts and protect your assets while managing your other financial obligations, it may be worth exploring Chapter 13.
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What Are the Disadvantages of Filing Chapter 13 Bankruptcy?
While Chapter 13 offers many benefits, it’s not the right choice for everyone. Here are a few downsides to consider:
Long payment plan: You’ll need to make regular payments for 3–5 years, which can be difficult to stick with. Many Chapter 13 cases fail because people can't keep up with the strict budget.
Student loan interest can add up: Your Chapter 13 plan may not fully cover student loan payments, allowing interest to build up. You could end up owing more by the time your case is complete.
Complexity and need for professional help: Chapter 13 cases are more complicated than Chapter 7. Without professional help, the chances of success are low. Hiring a bankruptcy attorney can be costly, but their fees can be included in your payment plan.
You can schedule a free consultation with an attorney to get a sense of if they’re a good fit for you.
How Do I Know if Chapter 13 Is Right for Me?
This is a complicated question, but you can start by looking at some of the basics. The first question you should ask yourself is whether you have a regular income. Chapter 13 is called the wage earner bankruptcy because its success relies on the filer’s regular income. If you’re commission-based, a gig worker, or unemployed, Chapter 13 may not work for you.
If you do have regular income, take a look at your monthly expenses, excluding your debts. Ignore credit card payments, car loans, and other loan repayments. Do you have money left over at the end of the month if you don’t have to make all the minimum payments to your creditors? If so, Chapter 13 may be right for you.
What’s Better: Chapter 7 or Chapter 13 Bankruptcy?
Everyone’s situation is different, but most people who qualify for Chapter 7 prefer it because it tends to be faster, be more straightforward, and wipe out eligible debts without requiring a repayment plan.
That said, Chapter 13 can be a better option if you're trying to save a home from foreclosure or catch up on missed car payments. It also gives you the opportunity to pay off non-dischargeable debts, like recent taxes or child support, through your repayment plan. Plus, Chapter 13 helps if you have a co-signer you want to protect from creditors since the automatic stay applies to them as well.
In the end, the right type of bankruptcy depends on your income, what types of debt you owe, and your financial goals. Many people file Chapter 7 for the fresh start it offers, while others choose Chapter 13 to manage secured debts and protect their assets.
You can schedule a free consultation with a bankruptcy attorney to talk about your specific situation and which is best for you.
Chapter 7 vs. Chapter 13: What's Different?
Chapter 7 and Chapter 13 are both common types of personal bankruptcy, but there are some key differences to be aware of.
Eligibility Requirements
To be eligible for Chapter 7, you must pass a means test, which checks whether your income is low enough to qualify. Some people don’t qualify to file Chapter 7 because they have too much disposable income. For Chapter 13, you simply have to prove you have regular income, and your debt can’t exceed $465,275 of unsecured debt and $1,395,875 of secured debt.
Repayment plan
The biggest difference between Chapter 7 and Chapter 13 is that Chapter 13 filers are required to make monthly payments under a 3–5-year repayment plan. Payments are made to the bankruptcy trustee, who then distributes funds to your creditors.
No such repayment plan is required in Chapter 7. All eligible debt is discharged after the filer completes necessary steps and the court approves the case.
Debt Discharge
In Chapter 7, most unsecured debts like credit cards and medical bills are fully discharged. In Chapter 13, your debts may be partially or fully repaid through the required payment plan. After you complete the plan, your remaining eligible debts will be discharged. Some debts, like alimony, child support, recent tax debts, and student loans aren’t eligible for discharge.
Asset Liquidation vs. Keeping Property
Chapter 7 is sometimes called liquidation bankruptcy because if you own property that’s not protected by an exemption, the trustee can sell the property to pay your creditors. That said, the majority of filers keep all of their property when they file Chapter 7.
In Chapter 13, you can keep your property, including your home and your car, as long as you stay current on your repayment plan.
Time Frame
Chapter 7 takes 4–6 months from filing to discharge. Chapter 13 takes 3–5 years to complete due to the required payment plan.
Chapter 13 Bankruptcy FAQs
It can be difficult to decide which debt relief option is right for you. Asking questions and learning is a great place to start! Here are some of the most frequently asked questions about Chapter 13 bankruptcy.
Who Is Eligible for Chapter 13 Bankruptcy?
To be eligible for Chapter 13 bankruptcy, you need to meet two key requirements. First, you must have enough regular income to cover your living expenses and make monthly payments toward your repayment plan. This shows that you can propose the plan in good faith.
Second, there are debt limits for Chapter 13. As of 2024, your secured debts (like mortgages or car loans) must be less than $1,395,875, and your unsecured debts (like credit cards or medical bills) must be less than $465,275. These limits are adjusted every three years. Most people don’t hit these limits, but if you have a significant amount of student loan debt, it could be an issue.
How Much Does It Cost To File Chapter 13?
The filing fee for Chapter 13 is $313. You can’t get a fee waiver or pay the filing fee in installments when you file Chapter 13. You’ll also need to consider the other costs of filing bankruptcy, including the costs of the two required courses, legal fees, and miscellaneous costs. To learn more about the total cost of bankruptcy, read How Much Does It Cost To File Bankruptcy?
How Does Filing Chapter 13 Impact My Credit Score?
Chapter 13 will stay on your credit report for seven years, but the impact of it will lessen over time. Your credit score may drop initially after you file bankruptcy, but this will depend on your current score and whether or not you’ve already been missing payments. Many filers are surprised to see that their credit scores don’t drop much when they file or spring back fairly quickly.
To learn more, read How Will Bankruptcy Affect My Credit?
What if I Lose My Job While I’m in Chapter 13?
If you lose your job or your income drops significantly during Chapter 13, you have options:
Modify your plan: You can ask the court to lower your monthly payments to adjust for your reduced income.
Hardship discharge: If you can’t continue the plan due to circumstances beyond your control, you may qualify for a hardship discharge, wiping out some debts early.
Convert to Chapter 7: You can also convert your bankruptcy case to Chapter 7, which involves a new trustee and possibly liquidating non-exempt assets.
These options help make sure you aren’t stuck in a situation you can’t afford.
Is Filing Chapter 13 More Difficult Than Filing Chapter 7?
Yes. Even though most of the forms are the same, Chapter 13 is more complicated than Chapter 7.
That’s because Chapter 13 filers need to create a repayment plan that meets all the legal requirements. While many courts offer a standard plan to follow, making the most of what Chapter 13 has to offer often requires the help of a knowledgeable bankruptcy lawyer.
When Is My Debt Discharged in Chapter 13?
The bankruptcy court will enter your Chapter 13 discharge once you’ve made all the plan payments and completed all other requirements outlined in the Bankruptcy Code. Remember, most repayment plans last up to five years. When the bankruptcy discharge is entered, all dischargeable debts, including remaining credit cards, medical bills, and personal loans, are eliminated.
Let’s Summarize…
Chapter 13 bankruptcy helps individuals reorganize their debts and repay what they can over 3–5 years, allowing them to catch up on missed payments for secured debts like home mortgages while keeping their property. After completing the repayment plan, remaining eligible debt is discharged. Chapter 13 is designed for people with steady income who don’t qualify for Chapter 7 or want to avoid losing their property.
People who file Chapter 13 without a lawyer rarely succeed. Most lawyers offer free consultations, which is a good way to see if they are a good fit for your case. Upsolve can help connect you with an attorney near you for a free consultation.
