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What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy helps people struggling with debt by putting them on a repayment plan that can make it easier to pay back what they owe.

A Chapter 13 bankruptcy requires repayment over a three or five-year period. Once you have completed your repayment period some of your remaining debts may be completely "discharged" which removes your obligation to make any further payments.

Chapter 13 repayment plans limit your monthly payments to no more than 15% of your disposable income. Disposable income is money you have left over after paying your essential living costs.

How Are Chapter 7 Bankruptcy and Chapter 13 Bankruptcy Different?

The main difference between Chapter 7 and Chapter 13 Bankruptcy is how debt is repaid. With Chapter 13, you will repay all or some of your debts under a court-mandated repayment plan.

Chapter 7 bankruptcy does not put you on a repayment plan; eligible debts are immediately wiped out. However, it is only an option if your household's income is less than your state's median for a household of similar size.

Can I Qualify for Chapter 13 Bankruptcy?

To be eligible for a Chapter 13 bankruptcy repayment plan you must have:

  • Regular income.

  • Total unsecured debts under $394,725. Unsecured is a debt that is not backed by collateral, such as a car or home. Credit card and medical debt are unsecured debts.

  • Total secured debt under $1,184,200. Secured debt is a loan where you have pledged an asset as collateral. Your home is the collateral for a mortgage. A car is a collateral for an auto loan.

How Do I File for Chapter 13 Bankruptcy?

You should consider hiring a lawyer who specializes in consumer bankruptcy to help you petition for Chapter 13 bankruptcy protection. You will need to complete a series of official bankruptcy documents and submit a proposal for repaying your debts. A court-appointed bankruptcy trustee will review your plan, and contact your creditors, before approving a final repayment plan. Your petition for Chapter 13 Bankruptcy must be filed at a U.S. Bankruptcy Court. 

How Long Must I Repay Debts under Chapter 13 Bankruptcy?

If your household income is above your state's median you will be required to follow a repayment plan for five years. If you follow the repayment for five years some of your remaining debts will be "discharged" or forgiven.

If your median household income is below the state median you will be required to make payments for three years, after which some of your debts will be eligible for discharge.

What Debts Must I Repay in a Chapter 13 Bankruptcy?

Chapter 13 sorts your debts into three buckets:

  1. Priority Debts: These must be fully repaid. Priority debts include:

    • Child and spousal support.

    • Unpaid tax bills from the past three years.

    • Costs of your bankruptcy filing: including filing fees and lawyer fees.​

  2. Secured Debts: You may be able to reduce what you owe on certain secured debts, such as a car loan to the current value of that asset. The ability to reduce your outstanding loan balances is called a "cramdown," however you can't cramdown your mortgage for your home. If your goal is to keep a house or car or other asset-backed by a collateralized loan, you will need to pay off the loan.

  3. Unsecured Debts: Debts that are not backed by collateral can be fully discharged after you complete your court-mandated repayment plan.

You may also be able to discharge other debts, including some tax bills depending on the details of your court-approved plan.

Will Chapter 13 Bankruptcy Get Rid of All My Debts?

Student loans can't be discharged in Chapter 13 unless you qualify for a hardship withdrawal. Hardship withdrawals are difficult to obtain and are based on an injury or illness that prevents you from repayment.

What Is a Chapter 13 Bankruptcy Discharge?

After you follow a three or five-year repayment plan under Chapter 13 you will be able to have certain remaining debts erased. Unsecured debts, such as credit card balances and medical debt are eligible for discharge under Chapter 13.

You must complete a financial counseling course to be eligible for discharge and must not have applied for a prior Chapter 13 bankruptcy discharge within the past two years.

Can I Keep My Home If I File for Chapter 13 Bankruptcy?

Filing for Chapter 13 prevents a mortgage lender from proceeding with foreclosure. If your Chapter 13 petition is approved, your lender must allow you to attempt repayment as outlined in your repayment plan.

If under your repayment plan you are able to repay any overdue payments and stay current with ongoing mortgage payments you will be able to avoid foreclosure.

Can Collection Agencies Continue to Seek Payment Once I File for Chapter 13?

When you file for Chapter 13 bankruptcy protection, collection agencies are not legally allowed to keep seeking payment.

What Is the Cost to File for Chapter 13 Bankruptcy?

There is a $235 filing fee and a $75 administrative fee to file a Chapter 13 bankruptcy petition. You can ask the court for permission to pay the $310 in total filing fees in four monthly installments. You can also apply to have the fees waived. If you hire a bankruptcy lawyer, you will also be responsible for paying the lawyer's fees.

How Will Filing for Chapter 13 Bankruptcy Affect My Credit Score?

A Chapter 13 bankruptcy filing remains on your credit reports for up to seven years. If you are filing for bankruptcy protection, chances are your credit scores may already be low. If that's the case, the filing may not cause much more damage.

While the bankruptcy stays on your credit reports for seven years, you can begin to rebuild your credit by making on-time payments such as paying all your bills on time, the factor that affects your credit score the most.

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