Chapter 13 is the second most common type of bankruptcy and used primarily by individuals. The goal of Chapter 13 is to eliminate your debt by creating a repayment plan to pay back all or a portion of what you owe your creditors over three or five years. You make monthly payments to a court trustee, and the trustee distributes the money to your creditors. At the end of your plan, the remaining unpaid debts are discharged.

Filing Chapter 13 creates an automatic stay that stops most collection actions, which generally means creditors can’t seek wage garnishments, make calls demanding payment or file lawsuits. Automatic stays also protect your co-debtors and can save your home from foreclosure. However, you must continue to pay your mortgage, or the lender can get the court to start foreclosure proceedings.

Chapter 13 bankruptcy works especially well if you can afford to pay some, but not all, of your debt. If you’re faced with unsecured debts, including credit cards and medical bills, Chapter 13 helps you achieve a more manageable and affordable payment. It helps you get past late payments on your home, car or other debts. It protects your property while giving you time to pay off your debts and attorney fees within a monthly payment plan.

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.

Chapter 7 and Chapter 13 are the two common types of bankruptcy that affect consumers. Either could help when you don’t have the means to pay all your bills, but there are important differences between the two.

A Chapter 7 bankruptcy can wipe out certain debts within several months, but a court-appointed trustee can sell your nonexempt property to pay your creditors. You also must have a low income to qualify.

A Chapter 13 bankruptcy allows you to keep your stuff and get on a more affordable repayment plan with your creditors. You’ll need to have enough income to afford the payments and be below the maximum total debt limits (currently nearly $400,000 for unsecured debts and $1 million-plus for secured debts).

A court will approve the Chapter 13 repayment plan, which usually lasts three to five years, and your trustee will collect your payments and disburse them to your creditors. Once you finish the plan, the remainder of the unsecured debts is discharged.

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.

In Chapter 13 bankruptcy, you can keep all of your property. But that doesn’t mean that you won’t have to pay for some of it. You’re allowed to protect, or “exempt,” a certain amount of equity in the property you’ll need to maintain a home and job. If you want to keep nonexempt property, such as a boat, baseball card collection, or another luxury item, you’ll have to pay for it through your Chapter 13 plan.

Also, if you want to keep a home, car, or some other property that you’re still paying on, and you put up the property as collateral (agreed that the creditor could take it back if you failed to make your payment), you must continue to make the payments and be able to pay back any arrearages over time.

A Chapter 7 bankruptcy is a major derogatory mark that can hurt your credit for years to come. The Chapter 7 bankruptcy record can stay on your credit reports for up to 10 years from the filing date, and a completed Chapter 13 bankruptcy can remain on your credit report for seven years from the filing date.

The accounts that were included in your bankruptcy may fall off your credit report earlier, as most negative marks get removed after seven years.