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Chapter 13 Bankruptcy: What It Is and How to File

Chapter 13 restructures debt into a repayment plan lasting three to five years and lets you keep assets like your home.
March 2, 2018
Paying Off Debt, Personal Finance
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Chapter 13 bankruptcy lets you restructure overwhelming debts under the protection of a federal court, setting up a repayment period of three to five years.

This is also called “wage earners” bankruptcy, because you must have a regular income to qualify. The goal is to resolve some debts and get current on secured loans — those with collateral, such as a home or car.

Do you qualify for Chapter 13 bankruptcy?

To qualify for Chapter 13 bankruptcy:

  • You must have regular income
  • Your unsecured debt cannot exceed $394,725, and your secured debt cannot exceed $1,184,200
  • You must be current on tax filings
  • You cannot have filed for Chapter 13 in the past two years or Chapter 7 in the past four years
  • You cannot have filed a bankruptcy petition (Chapter 7 or 13) in the previous 180 days that was dismissed for certain reasons, such as failing to appear in court or comply with court orders

If you don’t qualify for Chapter 13, consider looking into other debt relief options.

How do you file for Chapter 13 bankruptcy?

When considering whether to file bankruptcy, meet with a credit counselor from a nonprofit credit counseling agency and with a bankruptcy attorney. Both initial consultations should be free. These meetings will help you understand your circumstances and decide whether bankruptcy is the best route to getting your finances back on track.

In Chapter 13 bankruptcy, you and your attorney will work to prove your eligibility for a debt reorganization to a bankruptcy trustee, who administers the proceedings. You’ll get court approval of a plan to repay both unsecured and secured debts in part or in full. You’ll pay over three to five years and will retain your assets. At the end, the remainder of some debts may be forgiven.

Once you’ve decided to file, you’ll go through these steps:

  1. Credit counseling: Complete pre-filing bankruptcy counseling through a nonprofit credit counseling agency. Your counselor may also help you draft a repayment plan.
  2. Get an attorney: Hire a qualified bankruptcy attorney. Chapter 13 is very complex, and skipping a step or improperly filling out a form can lead to your case being thrown out or not having certain debts covered.
  3. Fill out paperwork: Your attorney will help you fill out the various forms required to file. You’ll need to gather information on your whole financial picture, including debts, income, property and monthly expenses.
  4. Submit bankruptcy petition: Also known as “filing” the bankruptcy, submitting the various forms kicks off the process. A bankruptcy trustee will be appointed. As soon as you file, you enter what’s called an “automatic stay,” which means that most attempts to collect on your debts must cease.
  5. Submitting payment plan: Within 14 days of filing the petition, you must submit a proposed payment plan. You must start making payments on the plan within 30 days of filing the petition, even if it hasn’t been approved yet.
  6. Meeting of creditors: Between 21 and 50 days after filing the petition, the trustee will host a meeting in which creditors can discuss any issues they have with you.
  7. Confirmation hearing: No later than 45 days after the meeting of creditors, you, the trustee and creditors who wish to attend meet in court to confirm the payment plan.
  8. Payment: Over three to five years, creditors are paid as agreed under the plan.
  9. Debtor education course: Before the Chapter 13 bankruptcy is complete, you must complete a “debtor education course” from a nonprofit credit counseling agency.

Click through these sections to learn about whether Chapter 13 bankruptcy is right for you and how to rebuild from bankruptcy.

Consider bankruptcy if your problem debts total more than 40% of your annual income or would take five years or more to pay off even if you took extreme measures. Chapter 13 may be your best bankruptcy route if:

  • You want to keep certain assets or you’re behind on your mortgage or car payments and want to make them up over time
  • Most of your debts are student loans, child support or other debts that either can’t be or are highly unlikely to be discharged under Chapter 7
  • You have a co-signer on an account in arrears. With Chapter 7, creditors are free to go after your co-signer even though you’re protected. If you file Chapter 13, you can arrange to pay off the co-signed debt in your repayment plan, protecting your co-signer.

Use the free initial consultation that credit counselors and many bankruptcy attorneys offer to learn about bankruptcy and other debt relief options, such as a debt management plan through a credit counseling agency.

Chapter 13 bankruptcy will stay on your credit reports for seven years from the filing date, and during this time you’ll likely find it harder to get credit. Even so, your credit scores should start to recover. Researchers at the Federal Reserve Bank of Philadelphia looked at data from 2010-12 and found that those who completed their repayment plans and got a discharge saw their scores rise from 535.2 to 610.8.

Some debts typically can’t be erased in bankruptcy, including recent taxes, child support and student loans. Bankruptcy still may be an option for you, though, if erasing other kinds of debt — credit cards, personal loans, medical bills — would free up enough money to pay the debts that can’t be erased.

“Bankruptcy is not a panacea for every situation, and I think that if you’re contemplating doing it, you should have a frank conversation with an attorney,” says California bankruptcy attorney Matthew Olson. “There’s the downside of the hit on your credit report, but frequently that will be outweighed by relief of stress and getting this problem solved and letting you move forward with your finances.”

Chapter 13 bankruptcy takes longer than the other common form of consumer bankruptcy, Chapter 7, which forgives most forms of debt, like credit cards, medical bills and personal loans.

» MORE:  See if Chapter 7 bankruptcy is a better fit

Although a bankruptcy will linger on your credit reports for years, you can immediately start to offset that negative mark with positive information. Make sure you pay every bill on time, because payment history has the largest influence on your scores.

Other steps you can take to restore your credit include making and following a budget and using credit carefully. If you find it hard to get new lines of credit, consider a secured credit card at first.