Chapter 13 Bankruptcy - Comprehensive Guide 2021

Chapter 13 works well for higher-income filers who can afford to repay some debt. But all filers can use Chapter 13 to stop foreclosure and keep a house or prevent a vehicle repossession.

Chapter 13 offers options that aren't available in Chapter 7, like stopping foreclosure and repossession and paying debt over time. And, except for mortgages and student loans, you'll emerge debt-free. Sounds good, right? It is, but the monthly payments can be expensive. To find out if it will work for you, start by answering these questions:

  • Will Chapter 13 bankruptcy solve my financial problems?
  • Will I be able to erase debt and keep my property?
  • Will I qualify for Chapter 13?
  • What will happen after I file for Chapter 13?

The information below will help. Also, try using the ten-question bankruptcy quiz to spot potential issues quickly—it will flag areas you'll want to look into further.

Will Chapter 13 Bankruptcy Work for Me?

Don't worry—you're not the only person juggling finances. Chapter 13 filers are often in similar financial spots. Do any of these situations sound familiar? If so, you're on the right track. Otherwise, you might want to learn about Chapter 7 or compare the differences between Chapters 7 and 13.

Look for Jack, Kaylee, and Gabriel as we dive deeper into the nuts and bolts of Chapter 13—we'll use their situations to help explain each topic.

Will Chapter 13 Bankruptcy Solve My Debt Problems?

Chapter 13 is a numbers game. If you have enough monthly income to pay required obligations, Chapter 13 will solve your debt problems. You'll be debt-free except for long-term obligations that are more than five years in length, like mortgages and student loans.

Calculating Your Chapter 13 Repayment Plan

While figuring out how much you'll pay in a Chapter 13 plan isn't simple, it's doable. Plus, it's the only way to know whether Chapter 13 might provide a solution.

Here's what you'll do:

  • determine your plan length
  • calculate how much you'll need to pay toward debt, and
  • figure out if you'll have to pay extra for your property.

Step One: How Long Will Your Chapter 13 Plan Be?

A Chapter 13 plan is either three or five years. You can choose a three-year plan if you qualify for Chapter 7. If you make too much to qualify for Chapter 7, you'll pay into a five-year plan. If you don't qualify for Chapter 7, go to Step Two.

Special rules for filers who qualify for Chapter 7. You'll use actual expenses rather than the calculations below, so figure out whether you'd have enough income to catch up on your house or car payment if you weren't paying your credit card bills and other dischargeable debt payments. You can pay over five years if lowering the monthly payment would help. You'll find the list of debts you can wipe out fully below.

Step Two: Which Debts Get Paid in Your Chapter 13 Plan?

Everyone must pay monthly living expenses, so your calculations will start there. But your costs must be reasonable, so if you're living a lavish lifestyle, plan to cut back. Include mortgage and car payments if you intend to keep the property. These are known as "secured" debts.

You're likely thinking, "That wasn't so bad." Well, buckle up because the next step is where the rubber meets the road. It will help to understand the differences between secured, priority, and unsecured debts. It will make it easier to understand which debts you must pay in full:

  • "Priority" debts. Important obligations, like child and spousal support arrearages, recent tax debt, and back employee wages, must be fully repaid through the plan. If you owe a lot, your plan payment can get expensive fast.
  • Late payments on mortgages, car loans, and other "secured" property. You can return a house or vehicle to the lender. But if you want to keep secured property, you must make the regular monthly payment and catch up on any overdue payments through the plan. Otherwise, the lender can take the property using its lien rights (after getting permission from the judge). Homeowners will continue to make the payments after bankruptcy.

You'll convert these numbers into your monthly payment by dividing the total by sixty and adding it to your monthly expenses. If your income exceeds that amount, you're doing well, and you'll likely be able to fund a plan.

Here's where you get a break (but you're not out of the woods yet—there's a third step). Any remaining "disposable income" will be shared by creditors in the bottom "nonpriority, unsecured" category. So you won't have to pay them in full. The discharge order will wipe out the following debts:

  • credit card debt
  • medical bills
  • utility bills and back rent
  • money owed on a lease or contract
  • payday loans and other personal loans
  • marital property division debts (in Chapter 13 only), and
  • even more (but the others are more obscure).

You'll notice that the list doesn't include student loans. You'll pay them in this category, so you'll likely pay less than you'd usually pay, but you won't be able to wipe them out. Unless you file and win a separate action, you'll still have a student loan balance at the end of your case. Be sure to look into how a bankruptcy will affect your current repayment schedule (it could have negative ramifications). Learn more about debts that get wiped out in Chapter 13 bankruptcy.

Step Three: Will You Have to Pay for Property?

Bankruptcy promises a fresh start, not new struggles. So don't worry about losing everything you own in Chapter 13. Unlike Chapter 7, you won't lose anything at all. But there's a catch. You might have to pay for some of your property. Here's why.

Every state allows you to "exempt" or protect essential belongings like furnishings, a car, some amount of home equity, and a retirement account. But you must pay the value of items that an exemption doesn't cover (minus sales costs) through your repayment plan.

Start by reviewing your state exemptions, and check whether you can use the federal bankruptcy exemptions instead. Some states allow you to choose the list you prefer, and depending on what you own, the federal list might protect more of your property than your state's exemptions. After choosing your list, add up the value of any property you can't exempt.

You'll find your state's bankruptcy exemptions here. Links to individual states are at the bottom of the article. If your state isn't there, check Nolo's state bankruptcy exemption articles.

Of course, there's another tricky angle here. You won't add this amount to the total monthly payment amount we calculated in Step Two. Instead, compare it to the priority and nonpriority unsecured debt amount. If the current number is higher, you'll use it instead of the priority and nonpriority unsecured debt amount.

So what's the point of this? Unsecured creditors must get at least as much as they would in a Chapter 7 case. The new amount is what your creditors would receive if the Chapter 7 bankruptcy trustee sold your nonexempt property in Chapter 7.

How Much Would Our Filers' Chapter 13 Payments Be?

If you're finding it challenging to understand how these figures work together, you're not alone. This chart should help. We are assuming that our filers will pay secured mortgage and car payments outside of the plan, so the 10% fee hasn't been applied to those expenses. If your jurisdiction requires you to make those payments within the plan, the trustee fees will increase significantly.

How Do I File for Chapter 13 Bankruptcy?

You'll start the bankruptcy process by filing the bankruptcy "petition" and a proposed Chapter 13 repayment plan with the bankruptcy court. Most Chapter 13 bankruptcy petitions are about 55-60 pages long, and it takes a bit of work to complete them. You'll include information about your assets and debts, income and expenses, and previous financial transactions. Also, filers must take a counseling course and file the completion certificate.

Filing your paperwork isn't free, but the bankruptcy forms are—you'll find the bankruptcy form list here.

What Will Happen After Filing for Chapter 13 Bankruptcy?

Shortly after filing your bankruptcy petition, the court will mail a notice to you and your creditors that will include the following information:

  • bankruptcy filing number and date
  • automatic stay order notifying creditors to stop collections
  • meeting of creditors date, and
  • other filing deadlines.

The automatic stay stops most creditors from trying to collect from you, so the calls, letters, wage garnishments, and even collection lawsuits should come to a quick halt. But it doesn't stop all actions.

The 341 meeting of creditors is the one event all filers must attend. You'll turn over financial documents for the trustee's review beforehand. At the meeting, the trustee will check your identification and asks questions about your filing and proposed Chapter 13 repayment plan. Creditors can appear and ask questions too, but they rarely do.

Before finishing your plan, you'll take the debtor education course and file the completion certificate with the court. After completing your plan, you'll file a few more forms and wait for your bankruptcy dischargethe order that wipes out your debts.

What Happens After My Chapter 13 Bankruptcy Case Ends?

You'll begin rebuilding your credit. You might be surprised to learn that many people are offered credit cards soon after filing. Accept an unsecured card with the highest limit available if you're ready to handle a credit card responsibly. If you keep the balance as low or fully paid, your credit score will go up. If you can't get an unsecured credit card, try our other credit-building suggestions.

Need More Help?

We want you to find the information you need. For more easy-to-understand bankruptcy articles, go to TheBankruptcySite or consider buying a self-help book like Chapter 13 Bankruptcy by Attorney Cara O'Neill.

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 consulting with a local bankruptcy lawyer.

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