Complete Guide: Chapter 13 Bankruptcy

When you’re behind on your bills and collection notices pile up, you might consider filing for bankruptcy. You have a few options, but Chapter 13 is for people with regular income. It’s even called an “employee plan” because you use your income to pay off some of your debt over a period of three to five years. At the end of this period, most of your remaining debts can be discharged.

Between 2005 and 2017, approximately 4.1 million Americans filed for Chapter 13 bankruptcy. But because this process has long-term financial consequences, you should understand how Chapter 13 works before proceeding to the next steps.

What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is a legal process that allows you to restructure your debt so that it is more manageable. Over three to five years, you will pay your creditors a portion of the outstanding debt. At the end of your repayment plan, any remaining debt can be “paid off,” which means you no longer have to pay it. Because you will be paying most, if not all, of your debt, Chapter 13 is sometimes called a “reorganization.”

How it works

With the help of a lawyer, you’ll file a Chapter 13 petition in bankruptcy court, along with a proposal to pay off your creditors over time. While you don’t have to hire a lawyer, knowing them can improve your chances of success.

In one American Bankruptcy Institute Study 201741.4 percent of bankruptcy filers who hired a lawyer completed their repayment plans, compared with just 2.3 percent of those who represented themselves.

Once the judge approves your proposal, you will send a monthly payment to a court-appointed trustee. This person will collect and distribute payments to your creditors over a period of three to five years.

Why would anyone testify for chapter 13

Here are some of the reasons Chapter 13 may be your best avenue:

  • You may be able to keep your house. Chapter 13 can allow a debtor who is behind on mortgage payments and facing foreclosure to catch up on payments, reinstate the mortgage, and stay in the house.
  • Co-signers cannot be held legally responsible. A section of Chapter 13 law known as a “co-debtor stay” prevents creditors from suing anyone who co-signed for you on a debt.
  • You have the right to sell your property. Since you have made arrangements to pay off your creditors, you are free to sell your property when it generates the greatest value.
  • You can keep your business running. If you are a sole proprietor, Chapter 13 keeps you in business. It’s important to remember that your business needs to generate enough income to help you make monthly Chapter 13 payments.
  • Your debt is frozen. All debts on unsecured receivables are frozen on the day you enroll in Chapter 13, meaning that the payments you make to your creditors are used to pay off the debt, rather than being eaten away by interest and fees. delay.

How do I know if I need to apply for Chapter 13?

Usually, people choose Chapter 13 when their monthly debt payments are too much to handle, but they have a job and want to keep some assets. If you’ve run out of credit cards, can’t afford basic items like groceries, and constantly avoid phone calls from debt collectors, you might want to consider this route.

Bankruptcy can have lasting effects on your credit and financial options going forward, so talk to a credit counselor or bankruptcy lawyer first. They can help you decide if it’s the right decision for you.

How to file for chapter 13

If you are considering Chapter 13 bankruptcy, it helps to know if you might qualify and what steps to take. The process can take around three to four months before you begin the repayment plan.


When you file for Chapter 13 bankruptcy, you will need to meet certain requirements. The court will verify that:

  • You earn regular income. If your income is below the median level for your state, you will pay off your debt over three years. But the court can allow you to pay off your debt over five years if your income exceeds the state’s median.
  • You are not behind on taxes. The court can ask to see several years of tax returns filed.
  • Your debts are not over the limit. The debt limits for the Chapter 13 filing are $ 419,275 unsecured debt and $ 1,256,850 secured debt.
  • Enough time has passed since your last deposit. You can receive a discharge as long as you have not filed for Chapter 13 in the past two years and Chapter 7 in the past four years.

Steps to file chapter 13

There are several steps you legally need to take to prepare for the bankruptcy process and file your petition properly. A lawyer can help you follow these steps so that you can eventually complete your repayment plan.

  1. Find a approved credit counselor to help you assess your options. If you decide to go ahead with bankruptcy, you can hire a bankruptcy lawyer to help you complete the paperwork.
  2. File for bankruptcy with your local bankruptcy court, as well as $ 310 in fees and a payment proposal that explains how you plan to repay your creditors.
  3. Meet your statutory trustee, who will review your file and organize your meeting of creditors. At the meeting, you will answer questions about your debt and the proposed plan.
  4. Attend a confirmation of charges hearing, where a judge will review your request and decide whether you can afford to proceed with your proposal. Based on that decision, you’ll either go ahead with Chapter 13, or you’ll have to change the plan or file for Chapter 7 bankruptcy instead.
  5. Follow the repayment plan over three to five years. Your Trustee will collect and distribute the payments during this period. Once you are done with the repayment, the bankruptcy case will be discharged.

Final considerations

A Chapter 13 bankruptcy typically stays on your credit reports for seven years from the date you filed the petition. This can lower your credit score by about 130 to 200 points, but the effect on your credit wanes over time.

As your credit recovers, it can be difficult to qualify for new credit, pass an employment background check, apply for a mortgage, or get the best interest rates on credit products. There is also pressure to stick to your three to five year plan, as missing payments could lead to layoff. In this case, you risk losing all the assets you were trying to protect.

Next steps

If you’re having trouble paying your bills and answering calls from debt collectors, talking to a credit counselor will help. They will help you review your budget, credit, and debt to help you make a plan.

Chapter 13 might be the right solution to help get your finances back on track. Find a reputable bankruptcy lawyer and see if you qualify for free legal services.

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