Chapter 13 Bankruptcy
Chapter 13 bankruptcy provides a solution for many people in financial trouble who:
- Have too much income to file for Chapter 7 bankruptcy
- Have nonexempt assets they want to keep
- Need to manage secured debt like car loans and mortgages
The information on this page will give you a general overview of what Chapter 13 bankruptcy is and how it works. An experienced bankruptcy lawyer can answer any specific questions and help you decide whether Chapter 13 bankruptcy might be the right solution for you.
What is Chapter 13 Bankruptcy?
Chapter 13 bankruptcy was designed to let people catch up on past-due balances over time. This typically helps people who have regular income and can afford to pay down their debts, but can’t do it quickly enough to satisfy creditors and debt collectors.
In most Chapter 13 cases, the bankruptcy court enters an automatic stay as soon as the case is filed. That’s a court order that stops creditors and debt collectors from collection activity–even if they’ve already filed a lawsuit against you or have scheduled a foreclosure sale.
A Chapter 13 bankruptcy plan stretches out past-due amounts over three to five years. As long as the bankruptcy filer follows the rules and stays current with plan payments, the automatic stay typically remains in effect the whole time. In some cases, balances may even be reduced or interest rates lowered. Depending on the specifics of the case, some unsecured debt like credit card balances and medical bills may even be eliminated.
Who Can File Chapter 13 Bankruptcy?
Chapter 13 bankruptcy filers don’t have to pass the means test like Chapter 7 filers. But, there are a few limitations on who can take advantage of Chapter 13.
First, to get a Chapter 13 repayment plan approved, the bankruptcy filer must have a reliable way to make plan payments. The Chapter 13 plan is sometimes called a “wage earner’s plan,” but the money doesn’t have to come from wages. A Chapter 13 plan can be confirmed based on disability income, a pension, regular trust fund payouts, or almost any reliable source of funds.
Chapter 13 also has set limits on the amount of debt that can be managed through a plan. These amounts update every three years. Until April 1, 2022, the cut-offs are $419,275 in unsecured debt and $1,257,850 in secured debt. The numbers are high enough that the debt limits aren’t an obstacle for most people who want to file Chapter 13. But, they may be a problem for those in areas with high property values who are carrying large mortgages.
There are also limits on the availability of a discharge if the bankruptcy filer has a prior case that was too recent. But, the main value of Chapter 13 is extending the time to pay past-due balances. Some filers will find Chapter 13 beneficial even if they don’t qualify for discharge.
The Chapter 13 Process
Chapter 13 bankruptcy begins much like Chapter 7, with the filing of a bankruptcy petition and schedules. The initial paperwork includes detailed information about debts and assets.
In a Chapter 13 case, the bankruptcy petitioner must also file a proposed Chapter 13 plan. Creating this plan can be complicated, because there are different rules for different types of debt. Some must be paid in full. Others can be reduced or otherwise modified, but the new amount must be paid in full through the plan. Still others may be fully or partly discharged.
The challenges of creating a workable plan that benefits the bankruptcy filer and will be confirmed by the bankruptcy court is one reason Chapter 13 cases filed without an attorney are much more likely to fail. In fact, a study published by the American Bankruptcy Institute (ABI) [1] showed that Chapter 13 cases filed with the assistance of an attorney were more than 18 times as likely to succeed as those people filed on their own.
Creditors and the bankruptcy trustee will have a chance to object to the plan, and sometimes negotiations and adjustments are required. Once a plan is confirmed, the bankruptcy filer must make regular monthly payments for three to five years. In some cases, unsecured debts that haven’t been paid through the plan are discharged at the end of the Chapter 13 case. That means the bankruptcy filer is no longer legally responsible for those debts.
Is Chapter 13 Right for You?
In short, Chapter 13 bankruptcy can take the pressure off, help people catch up secured debt without losing their property, and even eliminate some debt. It can be a powerful tool for turning around your financial life. But, it’s not the right solution for everyone. And, jumping in without adequate information can lead to costly mistakes.
A local bankruptcy lawyer can explain the differences between Chapter 7 and Chapter 13 bankruptcy in detail and assess your specific situation.
[1] https://s3.amazonaws.com/abi-org-corp/journals/numbers_08-17.pdf