Chapter 13 Bankruptcy
Chapter 13 is known as “reorganization” or “the wage earner’s bankruptcy.” In chapter 13, you pay your creditors through regular monthly payments over the 3-5 years.
Many people think that you pay your creditors in full, but most people who file chapter 13 are only paying a portion of their debt and at the conclusion of the case receive a discharge of the remaining debt. The amount that you repay to your creditors will vary depending on your income, your assets, and whether you have debt that must be paid in full through the plan.
Why file a chapter 13?
While you might file chapter 13 because you make too much money to file chapter 7, even if you qualify for chapter 7, you may want to file chapter 13 for the following reasons:
- Save property you would lose in chapter 7
- Save your home from foreclosure or catch up on past due payments
- Stop repossession of your car AND refinance your auto loan because the interest is outrageous
- Stop student loan creditors from garnishing your paycheck and limit your monthly payments on these debts.
- Resolve Tax liens or reduce monthly payments on priority tax debt
- Limit the monthly payments on non-dischargeable debt, such as student loans
- Stop a garnishment when you can’t immediately afford to file chapter 7.
What is chapter 13?
- Being an individual (not a business, except for sole proprietorships)
- Not having received a discharge after filing either chapter 7 or chapter 13 within the last 2 years. (NOTE: Even if you do not qualify for a discharge in chapter 7, chapter 13 can stop a garnishment and reduce the amount you must pay to creditors monthly).
- Being able to demonstrate a regular income that will allow you to afford monthly payments.
- Over the course of your debt repayment, your creditors must receive at least as much as they would if you had undergone chapter 7 property liquidation.
- Secured creditors receive equal monthly payments on the debt.
- Your debts are not more than $526,700 in unsecured debt and $1,580,125.00 for secured debt. (Limit is good through April 1, 2028).
How chapter 13 helps you pay back your debts more easily than “debt consolidation” or “debt negotiation”
There are many reasons that filing a chapter 13 is better than “bankruptcy alternatives.” Here is a simple visual comparison to help you way your options.
Keep in mind that once this plan is in place, it’s up to you to stick to it. Otherwise, your bankruptcy plan may be converted to chapter 7, risking the loss of property you may be trying to keep.
| Chapter 13 | Alternatives (debt negotiation) |
|---|---|
| One payment – all creditors are part of the plan. | No guarantee of a single payment. Creditors do not have to participate. |
| Automatic Stay protects from creditor’s harassing and collecting. | Creditors may continue to harass and collect even if they are participating in the debt management plan. |
| Protection for your co-signers. | No protection for your co-signers. |
| Certain time limit for eliminating or resolving debt. Typically, from 3-5 years. | Plan payments are not based on affordability, but on how much you owe. |
| Priority non-dischargeable debts are prioritized over other unsecured debt. | Priorities are not given to IRS and child support or spousal maintenance. |
| You know approximately what you will end up paying once your plan is confirmed. | You never know what you will end up paying, because the payments are based on estimates. |
| Most debtors do not get taxed on the amount they saved. | You will get taxed on the debt you save unless you prove to the IRS that you are insolvent (discharge of indebtedness tax liability). |
How the chapter 13 process works
For more detail on the exact process with my office, please see the chapter 13 timeline, but the basic steps are below.
- Sign representation agreement and pay attorney fee and filing fee.
- Provide documentation and file out questionnaire that provides information regarding your assets, liabilities, income, expenses and financial transactions going back up to 4 years.
- Complete your first credit counseling course and obtain certificate.
- I will complete the bankruptcy petition, schedules, statements and chapter 13 plan, and determine what your monthly plan payment will be.
- I will the review those papers with you – to review for accuracy and feasibility and your will sign the papers and they are then filed with the court.
- Complete your debtor education course.
- Make first payment to Trustee (within 30 days).
- Attend 341 Meeting of Creditors and answer questions.
- Make changes (if necessary) based on a Trustee or Creditor objections with the assistance of your attorney.
- Continue to make timely payments until case is confirmed by the court.
Once case is confirmed keep in communication with attorney and provide annual tax returns, report changes in income, receipt of bonuses, job changes, address changes and changes in marital status and they may impact your plan.
If the plan becomes untenable due to job loss or other financial challenges, you may have the options, to convert your case, dismiss and refile a chapter 7 or seek a hardship discharge.
How a bankruptcy lawyer can help
Chapter 13 of the bankruptcy code is extraordinarily complex. Since it’s a years-long process, any change to your financial situation—unexpectedly losing your job, for example—could necessitate changes to your payment plan. It’s hard to know what to do without experienced legal help.
Because there’s so much that goes into chapter 13, many people who file without a lawyer end up seeing their case dismissed. This means that they’ll continue to be subject to creditor harassment and wage garnishment, and they may lose some of their assets.
I’ve walked countless people through the labyrinth of chapter 13 and seen them emerge on the other side with the best possible long-term financial outlook going forward.