Chapter 13 Bankruptcy: How It Works, Who Is Eligible & More
Chapter 13 bankruptcy, also called “reorganization” or “wage earner’s” bankruptcy, requires debtors to restructure their debts and create a three- to five-year repayment plan. Under this bankruptcy option, debtors must use their future income to pay off creditors partially or in full. The arrangement allows debtors to extend the payment period on certain types of debt and retain all of their assets. It is the second most common form of personal bankruptcy after Chapter 7, or “liquidation” bankruptcy, which is a much swifter process compared with the multi-year timeframe of Chapter 13.
In this comprehensive guide on Chapter 13 bankruptcy, you will learn how the process works, who is eligible, how much it costs and more. At the end of the guide, you will also find advice from bankruptcy experts on ensuring a smooth and successful Chapter 13 bankruptcy.
Pros & Cons of Chapter 13 Bankruptcy
- You can stop foreclosure proceedings on your home, prevent repossession of your vehicle and retain all other assets.
- You can stop credit collections efforts, including garnishments, lawsuits and phone calls.
- You can eliminate the second mortgage on your home.
- You can lower the payments on your secured debt by extending the payment period over several years.
- You can catch up on mortgage payments, car loan payments or family support arrearages.
- You can eliminate some or all of your unsecured debt (e.g. credit card debt).
- You can protect any cosigners you have on consumer debts from creditors.
- You can possibly discharge your student loan debt or past-due taxes.
- You can make up payments that you miss during the life of your repayment plan if you experience a crisis such as an illness or if your car dies.
- You can still get a loan (but at unattractive terms).
- In return for the ability to retain your assets, Chapter 13 bankruptcy necessitates that you pay back the majority of your debts in full.
- Under a Chapter 13 repayment plan, your budget will be strictly enforced and must be maintained for up to five years. After making your monthly plan payment, all of your remaining disposable income must be allocated toward your unsecured debt. This could limit your spending flexibility.
- Information about chapter 13 bankruptcy will remain on your credit reports for 7 if discharged and 10 if not. This will result in significant credit score damage, making it much harder to take out an attractive loan or line of credit in the future.
- This bankruptcy type is typically more expensive than Chapter 7 because of higher attorney fees. However, the total cost of Chapter 13 is ultimately determined by federal laws, your state’s exemption laws, your marital status and your assets.
Chapter 13 Eligibility
You are eligible for Chapter 13 bankruptcy if:
- You are an individual (not a corporation or partnership), you are self-employed, or you own an unincorporated business
- You have regular income
- You have received credit counseling
You are not eligible for Chapter 13 bankruptcy if:
- Your income is too low
- Your income is irregular
- Your total secured debt is above $1,149,525 (figure up to date as of Oct. 2014)
- Your total unsecured debt is above $383,175 (figure up to date as of Oct. 2014)
Chapter 13 Bankruptcy Process
Every bankruptcy jurisdiction uses its own set of rules, forms, schedules and procedures. The bankruptcy court in your area will appoint a trustee to supervise the filing process and repayment plan.
In every case, the basic steps involved in a Chapter 13 bankruptcy can be broken down into the following three stages:
Stage 1: Pre-filing
- Get Credit Counseling: You must complete a credit counseling course from a government-approved agency or education provider within 180 days before filing a petition. Your counselor will assess your financial situation and ask about your income, assets, expenses, debts and goals. Based on your situation, the counselor will advise a course of action. In some cases, the counselor might also help you draft a debt repayment plan, which you must file in bankruptcy court if you decide to proceed with Chapter 13. Once you’ve successfully completed the course, you’ll receive a certificate stating that you’ve met the requirement, which you’ll then submit to bankruptcy court.
- Consult an Attorney: Once your credit counselor has determined that bankruptcy is the right option for you, the next step is to consult a bankruptcy attorney. An experienced bankruptcy attorney can help you complete the right forms, draft a repayment plan that’s likely to be approved by court and perform other services. Filing for bankruptcy on your own, or pro se, is strongly discouraged because of the high failure rate.
Complete the Forms: You must fill out and file in court a set of official forms
and schedules. The ones you’ll need are listed on page 4 of Procedural Form B 200 (they are not available directly from the court). The forms are separated into two sections: Part I includes the forms you must submit when you file your petition. Part II includes the forms you might need after filing your petition. Married individuals — whether filing jointly, separately or independently — must provide the required information for themselves and their spouses on the same set of forms unless they live in separate households.
In addition, you may need to submit local bankruptcy forms, which you can obtain from the court clerk or your bankruptcy attorney. In order to complete the forms, you must gather the following information:
- *Income: The amount, frequency and source of your income from the past six months as well as projected future income
- Assets: All of your property, such as your home, vehicle and savings account
- **Expenses: Your current and projected future monthly household living expenses such as food, clothing, medicine, shelter, taxes, transportation and utilities
- Debts: A list of your creditors (and your cosigners) as well as the types and amounts of debt you owe to each
*Filers under Chapter 13 are required to take a “Disposable Income Test,” which is comparable to the “Means Test” in Chapter 7. Unlike the means test, which determines whether your disposable income is sufficient to fund a Chapter 13 repayment plan, the disposable income test measures your “best effort,” or maximum ability, to pay off your unsecured nonpriority debt using all your disposable income. You will calculate that amount using Official Form 22C.
**When determining your household expenses (using Official Form 22C), you must consult the National and Local Standards set by the Internal Revenue Service. These standards define the monthly amounts for different categories of allowable living expenses that are reasonable and necessary for you to maintain your household. The National Standards apply to food, clothing, other household items and out-of-pocket health care expenses. The Local Standards apply to housing, utilities and transportation, which vary by area.
Stage 2: Filing Chapter 13 Bankruptcy
- File Your Forms: Submit your completed paperwork, including all required forms and schedules and a credit matrix (list of creditors) to the court with your filing fee.
Furnish Your Tax Papers: You must provide copies of your tax return from the most recent year, unfiled returns from previous years and any returns filed while your case is open to your bankruptcy trustee no later than seven (7) days before the first “341 meeting,” where you will attest to the truthfulness and accuracy of the disclosures in your bankruptcy petition. You will not file your tax returns in court (unless explicitly instructed to do so).
Tax returns may not have been filed during a particular year for one or more of the following reasons:
- The filer was unemployed
- The filer earned too small of an income to file
- The filer received only nontaxable income
If any of these circumstances applies to you and your trustee requires you to file these returns before you begin bankruptcy, you can easily do so with the Internal Revenue Service or request an affidavit from your attorney stating that you were not required to file for a particular year.
- File Your Proposal: You must submit your repayment plan proposal with your petition within 14 days of filing your forms and paying your filing fee. The court may grant an extension if you request it. If you developed your plan through debt counseling, you must file that as your proposal in court.
Stage 3: Post-filing
- Attend Your 341 Meeting: Between 21 and 50 days after filing your bankruptcy case, the court will notify you of a date and location for the “meeting of creditors,” also known as a “341 hearing.” During this mandatory meeting, your creditors and trustee may ask you questions about your finances and petition. You will respond under oath. If you do not attend this meeting, your case will be dismissed and no debt will be discharged. If a married couple files jointly, both spouses must be present at the meeting. Judges may not attend.
- Begin Making Payments: You will begin making monthly plan payments to your trustee within 30 days of filing your petition — regardless of whether the court has approved your proposed repayment plan yet — until all your debts are paid off. If any payments on your secured debt (e.g., mortgage or auto loan payment) are due before your plan is approved, or confirmed (see below), you must make those payments, which will be deducted from your monthly plan payment.
Attend Your Confirmation Hearing: No later than 45 days after the meeting of creditors, a judge will order a confirmation hearing and decide whether your repayment plan is feasible. Your creditors will be notified 28 days ahead of the hearing. They may object to your confirmation for different reasons, but common ones are that the payments they would receive are too low or that you aren’t committing all of your disposable income to your plan.
- If Your Plan is Confirmed: Your trustee will begin dispersing the appropriate portions of your payment to your creditors as soon as possible.
If Your Plan is Denied: There are several possible outcomes:
- You may modify and resubmit your proposal to the court.
- You may (or may be forced by the court) to convert your case to a Chapter 7 (liquidation bankruptcy).
- The judge may dismiss your case and perhaps also instruct the trustee to retain a portion of any monthly plan payments you have made to cover the cost of the bankruptcy proceeding. The rest of the funds would be refunded to you, less any disbursements already made to your creditors. If your bankruptcy case is valid, you shouldn’t worry too much about this scenario occurring.
- Resupply Your Financials: You’ll need to submit your financial information — such as copies of your income tax files — to your trustee on an annual basis.
- Complete Exit Counseling: Prior to discharge, you are required to complete a debtor education or personal financial management course through a government-approved agency or education provider.
- Satisfy All Court Requirements: Before receiving a discharge, you must overcome a few more hurdles such as making sure you’re current on your domestic obligations. (See “Prior to Getting Discharged” below.)
- Begin Anew: Upon discharge, all your remaining qualifying debts will be wiped out. Creditors may no longer initiate any lawsuits or collect on any of your discharged debts.
Chapter 13 Repayment Plan
One of the most important steps in the early stages of a Chapter 13 bankruptcy case is drafting a feasible repayment plan. We strongly advise hiring a bankruptcy attorney to help you design a proposal that is likely to be approved by the court and assist with other court procedures.
When Does a Chapter 13 Repayment Plan Begin?
Your repayment plan must begin within 30 days of filing your petition. Your creditors must adhere to your repayment plan once it has been approved by the court. At this point, creditors may not collect any claims against you.
How Much Will My Plan Payments Be?
Your monthly plan payment will be based on what you can afford, not what your creditors want you to pay, so the terms should be manageable.
Which Debts Are Included?
These debts comprise the core of your repayment plan and cannot be discharged, or wiped out, in a Chapter 13 bankruptcy:
Priority Debts: These are debts that must be paid first and in full, and they include:
- Child Support
- Certain Tax Obligations
- Debts for Death or Personal Injury (to another person) Stemming from Intoxicated or Drunk Driving
- Costs of the Bankruptcy Proceeding (e.g., attorney fees and trustee fees)
Secured Debts: These are long-term debts secured by collateral property. Once you have completed your plan, you will continue paying them off. They include:
- Car Loans
- Property Taxes
Any lien on secured debt may survive bankruptcy. Chapter 13 does not automatically remove liens on such property. As a result, the creditor may repossess collateral property (e.g. your car) or foreclose on your home upon conclusion of your Chapter 13 case if you fail to pay the debts. Consult your bankruptcy attorney on ways to reduce (known as “cramming down”) or remove (known as “stripping”) junior liens (e.g., second or third mortgages) on your secured property.
Arrearages: Arrearages are amounts by which you’ve fallen behind on regular payments to obligations such as a mortgage or an auto loan. These debts are usually paid at zero percent interest and stretched out over the life of the approved repayment plan. They must be paid in full during your plan.
Because mortgages and auto loans are long-term debts that may outlast your repayment plan, you’ll continue paying them off once your case concludes. But you’ll be current on these loans by the time you complete your Chapter 13 bankruptcy because the arrears, or missed payments, that caused you to default on the loans will have been paid during your plan.
- Other Secured Debts: These are debts that can be rescheduled and for which repayment can be extended throughout the life of the plan. You must continue paying any outstanding balance on such debts if you do not pay them off in full during Chapter 13.
Which Debts Are NOT Included?
These debts (except for student loans* — see below) can be discharged in a Chapter 13 bankruptcy.
Nonpriority Unsecured Debts: After making your monthly plan payments, any remaining disposable income must be paid toward your unsecured debts. In many cases, filers are not required to repay these debts in full, if at all, as long as two conditions are met:
- All of the debtor’s projected disposable income is allocated and paid toward these debts for the life of the plan.
- Through the plan, unsecured creditors receive at least the amount they would receive if the debtor had filed under Chapter 7.
Nonpriority unsecured debts include:
- Credit Cards
- Medical Bills
- Personal Loans
- Other Unsecured Loans
- Older Tax Obligations
- Student Loans*
*Generally, student loans cannot be discharged in bankruptcy. But because they are treated the same way as unsecured debt, the amount you must pay may be reduced — at least during the life of your repayment plan. Once you have completed your plan, you will continue to pay off your student loans.
One exception that allows student loans to be discharged is if they experience an "undue hardship,” which can be challenging to prove. Bankruptcy courts rarely grant such discharges. If you are granted an undue hardship discharge, the court may completely cancel your loans or only a portion of them.
How Long Will a Chapter 13 Plan Last?
The length of the process depends on your income and debt load. Repayment plans generally are proposed with three- to five-year timelines:
- If your current monthly income is more than the state median, you may propose a five-year repayment plan.
- If your current monthly income is less than the state median, you may propose a three-year repayment plan.
Regardless of your income, however, your plan will end once you’ve successfully repaid all of your debts in full, even if you haven’t reached the three- to five-year mark. However, five (5) years is the maximum period for all repayment plans.
Current monthly income is defined in the Bankruptcy Code as a debtor’s average monthly income from the past six (6) months prior to the start of the Chapter 13 case. Income includes contributions to household expenses from non-debtors (e.g. if a roommate or family member is paying your electricity bill) as well as contributions from your spouse if you are filing jointly. Income does NOT include Social Security benefits or payments you receive if you were the victim of a certain crime.
State median income figures can be obtained directly from the U.S. Census Bureau. You will need to consult these figures when you complete Official Form 22C, or the Statement of Monthly Income and Calculation of Commitment Period and Disposable Income.
Making Plan Payments
Your first monthly plan payment will be due within 30 days of filing your bankruptcy petition, regardless of whether the court has approved your repayment plan at that time. You will make your payments to the bankruptcy trustee assigned to your case, who then will disperse the appropriate amounts to your creditors. If you have steady employment with regular income, the court may order your payments to be automatically deducted from your wages and sent directly to the court.
If You Fall Behind on Payments
If you fail to make the required payments, there are several possible outcomes:
- Your trustee may modify your repayment plan.
- The court may discharge your debts on the basis of hardship such as illness, job loss or inability to regain employment.
- You can convert (or the court may force you to convert) your filing to a Chapter 7 case.
- Your bankruptcy trustee may petition for dismissal of your case. If this happens, you have two options:
- Prove to the court that you can get back on track with your repayment plan.
- Propose an amended plan of feasible payments and provide sufficient amounts to your creditors.
If the court decides that you do not have sufficient resources to complete your repayment plan, the judge may dismiss your case, in which case you will owe your creditors the current balance on your debts (i.e. the amount you owed at the start of bankruptcy — less any plan payments you’ve made — plus interest that stopped accruing while in bankruptcy).
Undue Hardship Exception
Courts realize that circumstances beyond your control may arise and prevent you from continuing to make plan payments during the life of your case. If you can prove to the court that paying your debts would cause you and your dependents undue hardship, the court may grant you a discharge.
To discharge your debt with the undue hardship exception, you must file a formal complaint called a “Complaint to Determine Dischargeability.” Generally, you must also prove that:
- The circumstances preventing you from proceeding with your plan are beyond your control and aren’t your fault.
- Your creditors have collected at least the amount they would have received had you instead filed for Chapter 7.
- It is not possible to modify your plan in order to make it more manageable.
In some cases, you may receive an undue hardship discharge if you sustain an injury or illness that limits your options for employment and earning a sufficient income to pay your creditors.
To determine undue hardship, courts use different tests, including:
- Brunner Test: Under this standard, which is the most common, you must meet three criteria: poverty, persistence and good faith.
- Totality of the Circumstances Test: Under this standard, the court will examine all relevant factors in your case.
- Other Tests: Some courts use other, less common standards. A local bankruptcy attorney may be able to tell you which test might apply in your jurisdiction.
Chapter 13 Bankruptcy Fees & Costs
Credit Counseling Charge
Credit counselors may charge a nominal fee, usually between between $20 and $50. But many will provide services for free or at a reduced price if you cannot afford to pay.
As of June 1, 2014, the total filing fee for Chapter 13 is $310, which combines a $235 case filing fee and a $75 administrative fee. Filing fees change periodically. You must pay the fee to the court clerk at the same time you submit your petition.
However, some courts allow filers to pay the fee in no more than four installments. The last payment must be made no later than 120 days after filing. To do so, you must complete Official Form 3A. Other courts will allow exceptions to this rule and extend the installment period “for cause.” In that case, the filer must make the final installment no later than 180 days after filing. Failure to pay the fees is grounds for case dismissal.
You can expect to pay, on average, between $3,000 and $4,500, depending on:
- Your Location
- Your Attorney’s Reputation and Experience
- Competitors’ Rates
- Your Assets and Income
These fees can be included in your debt repayment plan. Your attorney is legally obligated to disclose his or her fees to you. The bankruptcy court must also review and approve them.
Chapter 13 Bankruptcy Discharge
Dischargeable Debts (at the End of Chapter 13)
- Nonpriority Unsecured Debts
- Debts Caused by Breaches of Contract or Negligent Acts
- Debts Caused by Willful and Malicious Damage to Property (NOT to another person)
- Debts Caused by Nondischargeable Tax Obligations (i.e. If you paid your taxes with a credit card, this would be dischargeable in Chapter 13 but not in Chapter 7.)
- Debts Caused by Property Settlements in Separation or Divorce Proceedings (does NOT include alimony or child support obligations, which are nondischargeable)
- Nonpriority Tax Obligations That Meet ALL of the Following Criteria:
- The tax obligation must be federal or state income tax debt from a return that you filed at least two (2) years before filing for Chapter 13.
- The tax was due at least three (3) years ago and disclosed on a return.
- The tax was assessed at least 240 days before filing for Chapter 13.
- The return was filed without malicious or fraudulent intent.
Other Nondischargeable Debts
Besides the debts that are included in a Chapter 13 bankruptcy repayment plan, there are other debts that may survive bankruptcy, which means you will continue to pay them off once you’ve completed your Chapter 13 plan. These include:
- Debts Caused by Willful and Malicious Damage to a Person (NOT to property)
- Criminal Penalties (restitution or a fine resulting from a sentence if you were convicted of a crime)
- Debts Caused by Fraud or False Pretenses (e.g., if you lied on your loan application)
- Debts You Failed to Include in Your Bankruptcy Petition
- Complete a debtor education or personal financial management course through a government-approved agency or education provider.
- Prove to the court that you are current on child support and/or alimony obligations.
- You must not have received a discharge for a previous case filed within: A) two years for prior chapter 13 cases; and B) four years for prior chapter 7, 11 and 12 cases.
If you successfully complete your repayment plan
- You will have a confirmed or discharged case.
- Any remaining unpaid balances on unsecured debts will be wiped out.
- Discharged debt will no longer be enforceable against you.
Of course, if you do not successfully complete your repayment plan, you will have a non-discharged or dismissed case, which means you must continue paying your debts and creditors may continue to collect against you or initiate lawsuits.
Credit Impact of Chapter 13 Bankruptcy
Bankruptcy is just about the worst possible thing you can do to your credit score. How much damage it produces, however, depends on different factors such as your credit score prior to filing and what information was included on your credit report. Here’s how bankruptcy may affect your credit score after filing for Chapter 13:
- If you had bad credit to begin with, bankruptcy may cause only a slight decline in your score.
- If you had good credit to begin with, bankruptcy may cause your score to take a nosedive.
Chapter 13 and Your Credit Report
When you file for Chapter 13 bankruptcy, records will appear on your credit report under the following guidelines:
- The bankruptcy record, which is public information, will remain on your credit report for seven (7) years from the filing date (for a discharged bankruptcy). After that, it is erased from your history. For a dismissed or nondischarged bankruptcy, the record may stay on your credit report up to ten (10) years.
- The accounts that are part of your case will be marked “included in bankruptcy” on your credit report. These are separate from the bankruptcy record. Any accounts included in your bankruptcy will be removed from your history seven (7) years from the original delinquency date as opposed to the date you filed your case. Hence, some of these may disappear from your credit report sooner than your bankruptcy record because the delinquency predates filing.
Life after Chapter 13 Bankruptcy
You can rebuild your credit after bankruptcy. However, you must be prudent and patient when you do so. Otherwise, you’ll risk getting overextended a second time.
Once your bankruptcy is behind you, credit card and other loan offers may start to pour in. Lenders recognize that you cannot file for bankruptcy again for another several years, meaning any new credit card debt you incur can’t be discharged until then. But beware of such offers, which often come with unattractive terms, including exorbitant rates and fees.
Start by applying for a secured credit card, which almost always guarantees approval because the amount you contribute to a deposit will double as your credit line and therefore reduce the risk for credit card companies. Secured credit card activity is also monitored by the major credit reporting agencies, so it definitely will help improve your credit — that is, so long as you’re using your card properly and paying your bill in full by the due date each month.
Tips for a Successful Chapter 13 Bankruptcy
- Hire an Attorney: While adding an extra expense is likely the last thing an indebted individual wants to do, what you truly cannot afford is for bankruptcy not to work. After all, you’ve likely exhausted the other options at your disposal, and you don’t want to spend a bunch of money on filing fees and court costs only to see your case dismissed. That is why a good bankruptcy attorney will end up paying for himself.
- Don’t Conceal Your Assets: Be completely honest about your financial situation when you complete bankruptcy petition forms. Concealing your assets or misrepresenting information on documents can result in immediate dismissal, criminal prosecution or ineligibility to file for bankruptcy in the future.
- Propose an Affordable Repayment Plan: The most important stipulation of your Chapter 13 bankruptcy discharge is completing your repayment plan. If you make a plan you can’t afford, you likely will default on payments. Budget appropriately and realistically when designing your plan proposal.
- Try to Stay Disciplined: Do your best to follow your monthly budget. That means avoiding any big-ticket purchases during your repayment plan so you can meet the required monthly payments. Also keep in close communication with your trustee, who can help you stay on track and adjust your plan if necessary.
- Disclose Any Circumstantial Changes: Notify your bankruptcy lawyer or your trustee if your circumstances change, such as if you lose your job or take a pay cut. The court can amend or modify your plan anytime and possibly reduce your payments. Also notify them if you change your phone number, email address or mailing address.
- Submit Your Paperwork On Time: Sticking to your plan requires more than just making your monthly payments on schedule. Every year, you’ll also be required to furnish copies of financial documents, such as tax returns, to your Chapter 13 trustee. If you don’t submit the paperwork on time, your case could be dismissed.
Ask The Experts:
Because Chapter 13 requires strict adherence to a repayment plan over the course of several years, many filers find it painful to endure. But there are ways to reach the finish line with your sanity intact. We’ve asked a panel of bankruptcy experts to share their advice on staying focused or changing course. Click on the experts’ profiles to read their bios and responses to the following key questions:
- Chapter 13 cases often are dismissed because filers cannot keep up with the plan payments. How can debtors successfully stay on course with their plans?
- What is the advantage of filing for Chapter 13 as opposed to Chapter 7? What are the disadvantages?
- What are other good options for eliminating one’s debt besides resorting to personal bankruptcy?
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