Guide to Chapter 13 Bankruptcy
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Also known as a "wage earner's plan," Chapter 13 bankruptcy puts you on a plan to repay your creditors over a few years. Chapter 13 is also one of the most filed types of bankruptcies. The American Bankruptcy Institute estimates that 44.6% of all bankruptcies filed between September 5 and September 11, 2022, were Chapter 13.
Unlike a Chapter 7 bankruptcy, where your properties may be sold to pay off creditors, you don't lose any assets in Chapter 13, which means you can save your home from foreclosure (not a guarantee in Chapter 7). In addition, as is common in bankruptcy cases, filing a Chapter 13 petition triggers an automatic stay, which stops all collection efforts from creditors.
Related: The Best Apps for Debt Repayment
In this article
Chapter 13 eligibility
Only individuals can file for relief under Chapter 13 of the U.S. Bankruptcy Code if their secured and unsecured debts do not top $2.75 million as of the filing date. This is the biggest difference compared to Chapter 7. Eligibility criteria otherwise are more or less the same:
- If a previous bankruptcy petition was dismissed within the past 180 days because you didn't appear before the court or didn't obey its order, you can't file for Chapter 13.
- Failed to receive credit counseling from an approved agency within 180 days before filing? You can't file for Chapter 13 relief. Any debt management plans developed during these sessions should also be filed with the court.
In addition, there are also state median income requirements, which determine the duration of your plan.
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How does Chapter 13 bankruptcy work?
The process begins with filing a petition with a bankruptcy court in your state of residence. This filing must include the following:
- Schedules of assets and liabilities.
- A schedule of how much you make and your expenses.
- Any current contracts in effect as well as unexpired leases.
- A statement of financial affairs, which includes information on your financial situation.
- A certificate of credit counseling, and a copy of the debt repayment plan, if any.
- Proof of payment from employers received 60 days before filing.
- A statement of monthly net income, including any expected increase in how much you make or your expenditures stemming from the bankruptcy filing.
- A record of any interest in federal- or state-qualified education or tuition accounts.
In addition, you'll be required to gather information on:
- All of your creditors, how much you owe them, and the nature of their claims.
- How much do you make, how often are you paid, and where does that come from?
- A list of all of your properties.
- A detailed list of your monthly living expenses.
To your case trustee, you must provide a copy of your tax return or transcripts for the most recent tax year and any tax returns filed during the case. After you've provided all the information, the case trustee will meet with your creditors. In this meeting, you'll have to answer questions regarding your financial affairs and the proposed repayment plan under oath.
Confirmation hearing
You're required to file a repayment plan with the petition or within 14 days after filing. This plan must include information on fixed biweekly monthly payments. Bankruptcy laws state that you must pay the trustee within 30 days after filing the case, even if the judge hasn't yet signed off on the plan.
The bankruptcy judge overseeing your case will decide on the proposed plan during a confirmation hearing, typically held within 45 days after the meeting of creditors. The trustee will begin paying your creditors once the judge OKs the repayment plan.
Making it work
After the judge greenlights the plan, it becomes binding, and you'll have to make regular plan payments for a long time, starting with priority debts. You could make these payments directly or deduct them from the payroll, which may require changing your lifestyle. In addition, debtors may be barred from taking on new debt during the repayment plan. There's also a chance that 100% of the debtor's disposable income may be used for repayment.
But what if you fail to make payments? You would receive negative marks because the judge can either dismiss the case altogether or convert it to a Chapter 7 case, which may result in the loss of non-exempt property. Failure to pay child support or alimony grounds case dismissal or conversion to Chapter 7.
What does a Chapter 13 bankruptcy case trustee do?
A bankruptcy case trustee is impartial, which means they can't lean in favor of or against a party. But a case trustee's job is different in a Chapter 13 case compared to Chapter 7. In the latter's case, they gather the debtor's non-exempt assets, sell them, and distribute the money to creditors. In a Chapter 13 case, however, they're more of a middleman. Remember the repayment plan we talked about earlier? A Chapter 13 bankruptcy case trustee is tasked primarily with disbursing payments to your creditors.
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What types of debts are discharged in Chapter 13?
The primary goal of a Chapter 13 filing isn't to discharge debts but to repay creditors, including becoming current on any past-due payments. In general, however, a Chapter 13 filing's debt discharge is complex compared to Chapter 7. Yet, at the same time, the scope of the discharge is broader too. It is pertinent to note that debts will only be discharged after completing all payments under the plan. But in addition to making all the payments, the debtor must also certify that they:
- Haven't received a discharge in a prior case within a certain period.
- Have completed an approved financial management course.
- Have paid all prior domestic support obligations.
After the completion of the repayment plan, any remaining debts will be discharged. Remember when I said the Chapter 13 discharge is broad? Here are types of debt that can be discharged in Chapter 13 but not Chapter 7:
- Debts incurred for willful and malicious injury to property.
- Any debts you've taken on to pay nondischargeable tax obligations.
- Debts arising from property settlements in divorce or separation proceedings.
But what about student loans? Discharging these loans isn't outside the realm of possibility, but to get them discharged, you'll have to prove that student loan payments would put "undue hardship" on you, which can be tough.
Hardship discharge
You can ask for a hardship discharge if your economic situation worsens after the court has signed off on your repayment plan. But the hardship discharge's scope is more limited and may not include debts nondischargeable in a Chapter 7 petition. But the court may look favorably if you meet certain criteria, which include:
- Your failure to complete the payment plan is due to reasons beyond your control.
- The creditors have received money they would have received in a Chapter 7 liquidation case.
How long does Chapter 13 bankruptcy stay on your credit report?
Even if you're a casual reader of personal finance content, you're likely aware that your credit score takes a major hit when you file for bankruptcy. And, of course, when your credit score falls, so do your chances of securing future credit at favorable terms, such as lower interest rates. Regarding Chapter 13 specifically, you can expect it to fall off your credit report after seven years, calculated from the day of filing. By comparison, a Chapter 7 bankruptcy's stay on your report lasts 10 years.
According to Creditninja.com, you can expect to lose 200 points if your FICO score is above 670 and 130 to 150 points if your FICO score is below 669. But bankruptcies stopped having a big influence on your report a few years after. This is especially true if you've since improved money management, showing potential lenders that you're a responsible borrower.
Related: How to Remove A Bankruptcy from Your Credit Report | How to Recover from Bankruptcy
How much does it cost to file a Chapter 13 petition?
You'll incur two costs when filing for Chapter 13: one that goes to the court and bankruptcy attorney fees.
The courts charge a $235 case filing fee and a $75 miscellaneous administrative fee. If you can't pay these in a lump sum, you may be eligible to pay them in four installments. Unlike a Chapter 7 petition, where the filing fee could be waived under certain circumstances, there's no such option in a Chapter 13 filing. Failure to pay these fees may result in the dismissal of your case.
Bankruptcy lawyer fees vary widely, but you can expect to pay anywhere from $1,500 to $6,000. This fee depends on the case's complexity, your location, and the attorney's experience. If your bankruptcy case isn't too complex, you can proceed with a newer attorney, who will potentially charge you less. Alternatively, you could take a debtor education course and file it yourself.
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How long does a Chapter 13 bankruptcy take?
The repayment plan in a Chapter 13 case lasts three to five years. Why the variance? How much you make determines how long your case lasts. If your monthly income exceeds the annual state median, the bankruptcy process will remain in force for three years. And if your income is above the state median, you can expect to have your bankruptcy discharged in five years. If you make less than the median, the court may grant a longer period under certain circumstances. However, the plan cannot exceed the five-year limit.
Chapter 13 median income, U.S. states
State | 1 earner | Family of 2 people | Family of 3 people | Family of 4 people* |
Alabama $49,798 | $60,556 | $67,098 | $81,842 | |
Alaska | $64,003 | $86,628 | $103,223 | $103,223 |
Arizona | $55,839 | $69,975 | $75,560 | $85,714 |
Arkansas | $46,689 | $58,465 | $67,020 | $68,180 |
California | $62,938 | $83,435 | $92,735 | $106,530 |
Colorado | $67,768 | $88,178 | $96,223 | $115,473 |
Connecticut | $69,244 | $90,286 | $103,544 | $130,975 |
Delaware | $62,152 | $78,813 | $92,496 | $108,527 |
District of Columbia | $70,934 | $132,134 | $132,134 | $173,898 |
Florida | $53,182 | $66,748 | $71,689 | $85,203 |
Georgia | $53,105 | $68,295 | $76,391 | $92,286 |
Hawaii | $72,396 | $84,224 | $96,021 | $119,681 |
Idaho | $52,477 | $65,730 | $73,196 | $90,767 |
Illinois | $58,698 | $77,547 | $92,711 | $108,549 |
Indiana | $52,327 | $66,386 | $78,113 | $91,772 |
Iowa | $51,725 | $71,767 | $81,910 | $96,373 |
Kansas | $52,598 | $72,442 | $84,404 | $94,036 |
Kentucky | $49,646 | $59,017 | $68,293 | $82,626 |
Louisiana | $47,488 | $58,303 | $68,168 | $83,547 |
Maine | $55,354 | $69,713 | $83,145 | $92,782 |
Maryland | $71,839 | $94,405 | $108,879 | $131,859 |
Massachusetts | $71,708 | $92,034 | $112,146 | $142,040 |
Michigan | $53,815 | $67,015 | $80,465 | $99,179 |
Minnesota | $62,574 | $82,483 | $101,669 | $120,110 |
Mississippi | $45,317 | $54,584 | $58,459 | $71,528 |
Missouri | $51,144 | $66,490 | $76,431 | $90,521 |
Montana $54,870 | $68,613 | $76,078 | $82,969 | |
Nebraska | $51,474 | $72,321 | $86,989 | $97,943 |
Nevada | $54,394 | $69,804 | $77,536 | $84,764 |
New Hampshire | $72,047 | $83,344 | $107,942 | $129,738 |
New Jersey | $71,941 | $88,511 | $112,416 | $134,345 |
New Mexico $47,524 | $58,003 | $63,213 | $67,161 | |
New York | $60,696 | $77,159 | $92,508 | $112,424 |
North Carolina | $51,278 | $66,859 | $72,958 | $90,039 |
North Dakota | $55,701 | $78,927 | $90,689 | $105,279 |
Ohio | $52,415 | $67,059 | $79,022 | $96,175 |
Oklahoma | $49,127 | $63,789 | $68,193 | $79,426 |
Oregon | $62,059 | $74,283 | $89,565 | $101,773 |
Pennsylvania | $57,919 | $71,448 | $88,293 | $105,138 |
Rhode Island | $64,510 | $80,775 | $96,567 | $109,439 |
South Carolina | $49,999 | $64,874 | $71,757 | $86,278 |
South Dakota | $52,361 | $71,463 | $83,550 | $92,073 |
Tennessee | $50,801 | $63,983 | $72,011 | $86,983 |
Texas | $52,953 | $71,287 | $77,110 | $89,196 |
Utah | $67,265 | $73,754 | $86,562 | $96,607 |
Vermont | $56,093 | $74,509 | $88,472 | $112,466 |
Virginia | $64,870 | $82,910 | $98,253 | $116,328 |
Washington | $71,060 | $86,240 | $99,948 | $113,566 |
West Virginia | $50,855 | $55,518 | $68,537 | $74,508 |
Wisconsin | $55,334 | $73,061 | $88,431 | $104,987 |
Wyoming | $57,795 | $72,726 | $84,913 | $101,246 |
*Add $9,000 for each individual in excess of 4.
Data sourced from Census Bureau.
Key takeaways
Difference between Chapter 13 and Chapter 7 bankruptcy
Bankruptcy type | Cost | Stay on credit score | Purpose | Timeline |
Chapter 13 | Over $300, excluding attorney fees | 10 years | Dischargement of debts | 3 to 5 years |
Chapter 7 | Over $300, excluding attorney fees | 7 years | Rehabilitation of finances | 4 to 6 months |
Pros and cons of filing for Chapter 13 bankruptcy
Pros
- Stops foreclosure: You get to keep your home! Unlike Chapter 7, where your nonexempt property will be liquidated, there's no risk of losing your home in Chapter 13. You can stop foreclosure proceedings and may cure delinquent mortgage payments, but you must pay an amount equal to the value of nonexempt assets to your unsecured creditors.
- Automatic stay: A Chapter 13 filing triggers an automatic stay, which stops all collection efforts. This means creditors or debt collectors can't threaten you with jail time or wage garnishment.
- Protects co-signers: Unlike Chapter 7, a Chapter 13 petition protects third parties liable with the filer on consumer debts, including co-signers.
Cons
- The cost: Filing a Chapter 13 costs upward of $300. This excludes any fees a bankruptcy lawyer will charge you, which may drive up the cost by $1,500.
- Effect on credit score: Seven years! That's how long a Chapter 13 bankruptcy stays on your credit report. As for your FICO score, it'll dip by 200 points if your score was higher than 670 before the filing.
- Long timeline: A Chapter 13 case lasts for three to five years.
Alternatives to Chapter 13 bankruptcy
- Debt consolidation loan: You can use this loan to clear all your debts. This means you only have one loan to track instead of multiple debts.
- Balance transfer card: Many lenders offer a balance transfer card with 0% APR for some time. These cards are a great option if you're drowning in credit card debt.
- Debt settlement: You can engage a debt settlement company, which will negotiate with creditors to repay a portion of what you owe instead of the full amount.
- Chapter 7: This type of bankruptcy discharges unsecured debts such as medical bills and personal loans, and the case wraps up in a few months. The downside? If you're looking to file Chapter 7, you should be aware that you may lose your property if the bankruptcy trustee overseeing your case deems it nonexempt.
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- Subject to qualification and approval. $1,500 monthly income required.
- Apply in 5 minutes. If you qualify, chat online with a friendly online debt representative.
The bottom line
There's no shortage of debt-relief options. Debt settlement, debt consolidation loans, and traditional debt repayment strategies are all designed to reduce your debt load. But bankruptcy takes debt relief by a notch, eliminating some of your debts and stopping pesky debt collectors from contacting you. And Chapter 13 has a wider scope when it comes to debt discharge. But its main purpose is to repay your creditors for three to five years. If you decide to take the plunge, you should consult with an attorney and go from there.
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Writer
Jasir Jawaid is Joy Wallet's Assistant Editor. He has more than 13 years of experience as a journalist covering Wall Street, equities, financial policy and regulation, and cryptocurrency and blockchain.
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