Chapter 13 Bankruptcy: What It Is & How It Works

petition for bankruptcy

Who is eligible for Chapter 13 bankruptcy?

Chapter 13 bankruptcy is reserved for individuals and couples, rather than corporations and partnerships. It’s the 13th Chapter of the U.S. Bankruptcy Code (11 U.S. Code Title 11), hence the name Chapter 13 bankruptcy. You’re most likely eligible, assuming you have received credit counseling and possess a regular income sufficient for your living expenses.

Additionally, your secured debt must be less than $1,257,850, and your unsecured debt should be less than $419,275. If you had a bankruptcy petition that was dismissed with prejudice or for abuse in the last half-year, you cannot file until the 180-day waiting period has expired.

How does Chapter 13 bankruptcy work?

You and your lawyer will file all the necessary paperwork, such as the petition, a statement of financial affairs, the schedules, and your plan of reorganization.

You will pay several fees and possibly meet with your creditors, but your attorney will handle most details. If you plan to file on your own, you should be aware that the failure rate is very high.

In most cases, it’s highly recommended to hire a qualified bankruptcy attorney. Once your paperwork is submitted, your documents will then be reviewed by the Chapter 13 trustee and creditors. After that, you’ll begin your repayment plan.

Rather than discharging debts as in a Chapter 7 bankruptcy, Chapter 13 bankruptcy creates a multi-year repayment plan. You’re given a monthly payment amount based on your disposable income and necessary financial obligations.

That amount is then distributed amongst your qualifying unsecured creditors. You then have three to five years to resolve your debts. After you successfully complete the Chapter 13 repayment plan, your debts are fully discharged.

The entire process typically takes between three and five years of structured payments that are applied to your debt adjustment. Some debts won’t qualify for discharge, including federal student loan debt.

What will my duties be under chapter 13 bankruptcy?

Beginning April 1, 2019, when filing for Chapter 13, expect a certain amount of requirements to maintain your eligibility. For example, you must:

  • File all required tax returns before your creditor’s meeting
  • Send all creditors a notice of your bankruptcy
  • Maintain child support and alimony payments during your plan
  • Make all payments to the trustee during your adjustment period
  • Make all payments for agreed upon secured loans, such as your house and cars
  • Meet new tax obligations and not incur significant new consumer debt
  • Provide the trustee with annual tax returns and information changes in income
  • Get court approval for any new loan, or for buying, selling, or refinancing a home
  • No more than $419,275 in unsecured debts
  • No more than $1,257,850 in secured debts (including mortgages and car loans)

What is a bankruptcy trustee, and what is their role?

The trustee is a representative of the bankruptcy estate who works for the bankruptcy court and the federal government to review bankruptcy petitions and schedules.

This person generally handles most of the issues related to the processing and approval of bankruptcy cases. The trustee also acts as the disbursing agent for your payments and provides oversight on issues that might arise.

What is the role of my attorney?

In Chapter 13 bankruptcy, your bankruptcy lawyer generally analyzes all the particulars of your situation and prepares your estate, allowing you to keep as much of your property as possible. They will assemble all your information and data and handle your court paperwork and deadlines.

Your attorney will prepare your petitions, schedules, and statements for the bankruptcy filing. They will also draft your plan of reorganization and help you understand your duties. Attorneys will also meet with your creditors, attend hearings, and address issues with the trustee.

Additionally, attorneys will make necessary petitions and modifications if you need to change your Chapter 13 plan. They are now more liable for inaccuracies and other problems that could arise with your Chapter 13 case.

This means that many of the burdens of bankruptcy are taken off you and become the attorney’s responsibility.

Attorney’s fees vary from state to state but expect to pay anywhere between $1,200 and $2,500. Given the level of responsibility they carry on your behalf, it’s well worth the investment.

How does Chapter 13 bankruptcy affect my credit?

Chapter 13 bankruptcy will be publicly listed on your credit report for a total of seven years, during which time your credit will be negatively affected.

However, your credit score will slowly increase as you establish a positive payment pattern during your adjustment period, and it will continue to increase as long you keep up with your payments.

You can also expect an increased difficulty in obtaining credit. If you do qualify for a credit card or loan, you’ll pay some of the highest interest rates on the market.

You’ll also only qualify for smaller credit amounts, so it will become essential to save up cash reserves to have on hand for any financial emergencies that pop up.

What are exemptions in Chapter 13 bankruptcy?

Under Chapter 7, every state has a list of exemptions for things that don’t need to be sold to pay back creditors.

Usually, there is a monetary limit for each category of property you own, whether it’s your home, car, or household possessions. Under Chapter 7, your creditors have the right to liquidate assets not protected by this exemptions list.

However, in Chapter 13, instead of having those items liquidated, you must pay their full value to creditors as part of your adjustment plan. To fully understand how exemptions work in your situation and state, it’s helpful to talk to a lawyer.

What if I am self-employed or a business owner?

If you are self-employed or operate your own business, you must file a monthly financial report or business operating statement with the trustee before the 15th day of each month.

You’ll also need to verify your income before filing for Chapter 13 bankruptcy. If you own your own business, it’s even more important for you to maintain thorough documentation of your financials both before and during Chapter 13 bankruptcy.

What if I can’t continue to make all my payments?

If a situation arises under Chapter 13 in which you’re unable to make all your required monthly payments, you must show that it results from a serious income change or a necessary expense. Your lawyer must then file a moratorium with the bankruptcy court and creditors, which is subject to approval by the trustee.

In most Chapter 13 cases, you should be able to get approved for some type of catch-up plan, including lengthening your repayment term if you’re just suffering from a short-term financial setback.

For a long-term issue, you can apply for a modification. In the event of a severe hardship that makes it impossible for you to make your Chapter 13 payments, you can request a hardship discharge.

Another option is to convert your bankruptcy to a Chapter 7 and have your remaining eligible debts discharged. This is only possible if your new financial situation meets the income qualifications for Chapter 7 bankruptcy.

A final option is to dismiss your current Chapter 13 and file for a new one. Just make sure you request an automatic stay from the court to ensure creditors don’t resume their collection attempts as you pivot to a new bankruptcy plan.

Should I file for Chapter 13 bankruptcy?

There’s no right or wrong answer to this question. One of your first steps should be to undertake free credit counseling to see if you can figure out a manageable debt payment plan that works for your current situation. If not, you should then seek professional legal help.

It’s great to read up on the pros and cons of bankruptcy, but at the end of the day, so much depends on your personal situation. From your money to your state, there are countless small details that could influence what it means to take the best course of action.

Lauren Ward
Meet the author

Lauren is a personal finance writer who strives to equip readers with the knowledge to achieve their financial objectives. She has over a decade of experience and a Bachelor's degree in Japanese from Georgetown University.