Chapter 13 Bankruptcy
Chapter 13 bankruptcy is commonly called a "reorganization bankruptcy" for consumers. Instead of selling your property to pay debts, you will create and follow a repayment plan based on your current income.
What Is Chapter 13 Bankruptcy?
Chapter 13 is a type of consumer bankruptcy. It is called Chapter 13 because it is the 13th Chapter of the U.S. Bankruptcy Code (11 U.S. Code Title 11). If you are facing significant debt, you may be able to file for Chapter 13 to reorganize the debt so it is more manageable.
A Chapter 13 plan uses your regular disposable income to eliminate debts over three to five years. You will make monthly payments to cover your debts, and then some of your remaining debt will be discharged.
Basics and Eligibility for Chapter 13
Chapter 13 is typically used by people in debt who:
- Have income that exceeds the limits of Chapter 7 bankruptcy,
- Have significant secured debt that needs to be addressed, or
- Have property they want to keep and could lose in Chapter 7
You cannot file for Chapter 13 if:
- Your unsecured debt exceeds $419,275 (as of 2020)
- Your secured debt exceeds $1,257,850 (as of 2020)
During a Chapter 13 bankruptcy, you will create a repayment plan and make monthly payments for three to five years.
You will have several legally-imposed obligations when filing under Chapter 13. These include:
- Filing the required forms and documents with the local bankruptcy court in your area
- Paying a filing fee
- Making payments according to the proposed repayment plan
- Attending financial management classes
Eligibility for Chapter 13
Chapter 13 bankruptcy has its own set of rules and eligibility requirements. Business entities cannot file for Chapter 13 bankruptcy, although Chapter 11 bankruptcy may provide similar relief for a business. Only individuals or married couples can apply.
To qualify for a Chapter 13 bankruptcy, you must show that you are eligible for this form of relief. You must establish that:
- You did not have a prior bankruptcy application dismissed within the previous 180 days
- You have completed the Credit Counseling Requirement
- You filed your tax returns for the past four years
- The proposed plan repays all required debts
- The proposed plan will repay specific amounts to unsecured creditors
- You have enough income (after the deduction of allowable expenses) to cover mandatory payments to priority and unsecured creditors
Chapter 13 Compared to Chapter 7 Bankruptcy
There are two main ways to file personal bankruptcy under the U.S. Bankruptcy Code: Chapter 7 and Chapter 13 bankruptcy.
Chapter 7 essentially erases most of your debts in a "liquidation" bankruptcy. Typically, if you have assets that aren't exempt from liquidation under state or federal law, you must give them away to be sold. Chapter 7 doesn't include a repayment plan because the money from selling items covers debt, and the rest of what you owe is dismissed.
Chapter 13 does not sell your property and uses your current income to repay debt. You can still lose some nonexempt property if you cannot afford to pay it through your repayment plan, however.
How Does Chapter 13 Bankruptcy Work?
To begin a Chapter 13 bankruptcy, you will need to file critical documents and pay filing and administrative fees. An impartial trustee will be appointed to your case. This individual evaluates the case and distributes your money to the people you owe.
Filing a Chapter 13 Petition
A Chapter 13 bankruptcy begins with the filing of a petition with the bankruptcy court. You will have to fill out paperwork and submit it to the bankruptcy court where you live. You can find the proper court with jurisdiction over you by using your home address in the Federal Court Finder feature.
Spouses can file together or as individuals. You will only pay the filing fees once if you file jointly.
Chapter 13 Filing Fees and Administrative Fees
Make sure you check the current filing and administrative fees for a U.S. bankruptcy filing. As of 2020, you will pay the court clerk:
- $235 to file the case
- $75 in additional administrative and miscellaneous fees
If you can't afford the total $310 right now, you can ask the court to pay in four payments. You have to make all four payments within 120 days from filing.
If you face unique circumstances or hardships, you can ask the courts for an extension on the payments. They can approve up to 180 days from the day you file.
Required Information to Submit When Filing Chapter 13
To complete your petition, you must collect the following information:
- Your assets and liabilities
- Statement of monthly net income
- Current bills and expenses
- Current leases or contracts
- Financial statements
- Proof of completing credit counseling
- Your debt repayment plan
- Income from employers for the last 60 days (if any)
- Federal or state qualified education or tuition accounts
- Tax returns (usually for the past two years)
Even if you file as a married couple, both spouses need to gather their information for income, expenses, or anything that is not shared. If just one person files, the spouse still has to submit their information so the courts can accurately evaluate your household income and expenses.
Appointment of Bankruptcy Trustee
Your case will be assigned an impartial person to handle the management and administration. This is your bankruptcy trustee who will oversee the case from beginning to end.
The Chapter 13 trustee will:
- Review the case paperwork
- Represent your case in front of the judge
- Accept debt payments from you
- Use these payments to pay your creditors according to your repayment plan
- Answer questions and set timelines
While the trustee is there to help, they represent the courts and are not necessarily on your side. A bankruptcy attorney is the only person who will watch out for your best interests during the process.
The "Automatic Stay" in Chapter 13
Filing a Chapter 13 petition automatically "stays" (stops) most collection actions against you and your property, including foreclosure proceedings.
During bankruptcy, the automatic stay prevents collections agencies and debt collectors from:
- Starting or continuing lawsuits
- Taking money from your paycheck (wage garnishment)
- Harassing you (through harassing phone calls, etc.)
Sometimes this only stops them for a short time, and it doesn't stop all actions collection agencies can take.
At the start of the filing, you must provide a list of your creditors. Your trustee or the bankruptcy clerk will notify them of the bankruptcy — so make sure you include all of them on the list.
Protecting Co-Debtors With an Automatic Stay
The automatic stay in Chapter 13 also protects co-debtors or "co-signers." This protection extends to any co-debtors who signed loan or credit card agreements with you.
Creating a Repayment Plan
You will need to propose a 36-60 month payment plan to the court to repay your debt. The plan should be for:
- 36 months if your gross income is below your state's median income
- 60 months if your gross income is above the state's median income
Meeting of Creditors in Chapter 13 Bankruptcy
There will be a meeting of creditors between 20-50 days after you file bankruptcy.
During this meeting, you can expect to:
- Ask questions
- Answer questions from your creditors
- Be put under oath (lying under oath is illegal perjury)
- Review the repayment plan you created
- Find solutions to problems with your plan or concerns about the debt
If you filed jointly, you and your spouse should both attend this meeting. The judge will not be present at this meeting. They will rule on the case later.
Creditors File Claims Against You Within 90 Days
Once you have this meeting, your creditors will have 90 days to file claims about the debt you owe. This ensures they can legally get repaid during the three- to five-year bankruptcy repayment process.
If you owe a government agency or company a debt, they have 180 days to file their claims against you.
Repayment Plan Hearing
After the creditor's meeting is over, you, your trustee, and the creditors will have another hearing about the "final" Chapter 13 repayment plan. The plan is not fully final until a judge signs off on it at the final hearing.
Learn more about creating a repayment plan and dealing with creditors' claims.
Final Chapter 13 Discharge
Once the repayment period is over, you will likely receive a discharge of some of your debts. Obtaining a discharge in Chapter 13 bankruptcy will not eliminate all debts.
Exceptions to a Chapter 13 discharge include:
- Claims for child support and spousal support (alimony)
- Educational and student loans
- Any driving under the influence (DUI) liabilities
- Criminal fines and restitution obligations
- Certain long-term obligations (such as home mortgages) that extend beyond the term of the plan
- Any debts not provided for in a wage-earner plan
Foreclosure and Chapter 13
The automatic stay will stop foreclosure during bankruptcy and buy you some time. You can work to repay overdue mortgage payments after filing for Chapter 13. Note, however, that if foreclosure is completed before you file a Chapter 13 petition, the automatic stay will not protect the property retroactively.
You could still lose your home if:
- Your mortgage company has completed the sale of the home before you file for bankruptcy
- You don't pay your usual mortgage payments after you file (you can repay old payments later but need to keep up on your current payments)
Talk to an Attorney to Learn About Chapter 13
Getting the right help when you file for Chapter 13 bankruptcy is crucial to its success. Consider seeking a consultation with an attorney to help you decide when to file and if it is the right type of bankruptcy for you. Many bankruptcy attorneys offer consultations free of charge.