CHAPTER 13

Chapter 13 is the second most common type of bankruptcy, filed primarily by individuals and families who make too much money to qualify for Chapter 7. It is basically a reorganization that allows the filer to make payments within their budget over a three-year or five-year period instead of trying to keep pace with each creditor’s minimum monthly payments.

You make monthly payments to a court trustee, and the trustee distributes the money to your creditors. At the end of your plan, once you have completed your repayment term and assuming the filer meets all other requirements outlined in the Bankruptcy Code, some of your remaining debts may be ultimately discharged, which removes your obligation to make any further payments. Filing Chapter 13 creates an automatic stay which stops most collection actions, and generally means creditors can’t seek wage garnishments, make calls about payments or file lawsuits. Automatic stays also protect your co-debtors and can save your home from foreclosure.

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

Frequently asked questions

FAQ

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.

Chapter 7 is generally a more affordable option when compared to Chapters 13 and provides a relatively quick way to get out from under your debts. Filing Chapter 7 might be a good option if you:

  • Own little or no property
  • Have an income level that passes the means test
  • Have mostly unsecured debt, such as medical bills, credit card debts and personal loans
  • Don’t want to be stuck with a repayment plan for the next three or five years

When you have debts that won’t be discharged, such as unpaid income taxes, domestic support obligations or student loans, Chapter 13 may be the better option. Chapter 13 bankruptcy is also typically used when you want to save your home from foreclosure. If you have a high income that disqualifies you for Chapter 7 and you can afford to pay some of your debt, Chapter 13 may be your only option.

If you’re thinking about filing for bankruptcy, consult our attorneys. They can help you decide which Chapter of bankruptcy is right for your situation.

Notable differences between Chapter 11 and Chapter 13 are eligibility requirements. Chapter 11 is open to almost any individual or business without any specific income or debt-level limits. Chapter 13 requires you to have a stable income, has specific debt limits and is reserved for individuals or, in limited cases, sole proprietorships. Chapter 13 also includes the appointment of a trustee who collects and distributes payments to your creditors, which is seldom done in Chapter 11.

Despite the differences, there are also several similarities. Both Chapter 11 and Chapter 13 let you keep certain assets you might lose under Chapter 7 bankruptcy. Both may offer more help with car loans, mortgages and other types of unsecured debt. Under Chapter 7, if you’re behind on these payments and can’t catch up, you may lose the property.

Whether you file Chapter 7, Chapter 11 or Chapter 13, your credit score will suffer. Legally, credit report agencies can leave all three types of bankruptcies on your credit reports for 10 years from your filing date. However, they usually remove completed Chapter 13 bankruptcy cases in seven years.

If you file for bankruptcy, find out how it’s affecting your credit by getting copies of your free credit reports from the three major credit bureaus. Your credit reports are a snapshot of your financial habits, so there are many ways to rebuild your credit after bankruptcy. As you rebuild your credit profile, monitor the changes by viewing your credit scores.

Deciding whether bankruptcy is right for you really comes down to the nature of your debt and how vulnerable you may be to your creditors. Remember, not all your debts may be discharged during bankruptcy. Student loans typically can’t be discharged, except in cases of extreme hardship. Past due income taxes and child support may also not be eligible for discharge or a debt repayment plan. Also keep in mind that you will have to pay a filing fee–the price depends on which chapter you file for.

Filing bankruptcy can be financially, physically and emotionally draining. However, it may be your best option when bills keep piling up and you don’t have the means to pay your creditors. It’s also possible to recover from bankruptcy and rebuild your finances and credit, but it will take time.

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. 

Generally, the entire Chapter 13 process from the initial credit counseling to the point when the court discharges your remaining debts takes about four to six months. Your case could take longer.

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.

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