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The two primary forms of bankruptcy that consumers choose to file are Chapter 7 and Chapter 13. Chapter 7 allows a filer to liquidate nonexempt assets to pay off creditors and discharge their remaining debts. Chapter 13, called a wage earner’s plan, gives filers with regular income the opportunity to create a short repayment plan to pay off their debts.
In 2005, when Congress approved the Bankruptcy Abuse Prevention and Consumer Protection Act, it became more difficult for consumers to qualify for Chapter 7 bankruptcy, pushing more people to use Chapter 13. Since then, of the 12.8 million consumer bankruptcy petitions filed, 4.1 million have been for Chapter 13 bankruptcy.
In this guide, we’ve compiled some of the highlights that consumers should understand about the process, as well as the results and effects of filing Chapter 13 bankruptcy. Reading through may help you prepare for what’s ahead and ensure you better identify whether Chapter 13 is the right choice for you.
How Chapter 13 works
Unlike Chapter 7 bankruptcy, which eliminates a consumer’s debts without a payment plan, Chapter 13 bankruptcy is centered around creating an installment repayment plan that a filer can maintain for several years, which is focused on eliminating secured debts.
The payment amount and duration are not based on what it would take to pay off the full amount of the debt, but are instead based on calculations determined by the income of the filer, their discretionary income, their assets and their debt. Instead of forcing the debtor to tackle the full amount of their current debt at its current interest rates, Chapter 13 gives a debtor the opportunity to pay off a percentage of the debt based on what they can afford to pay over a three- to five-year period.
The amount they can “afford” is based on income calculations and state median statistics as described on the official forms. The focus of the debt repayment is secured debt, which is debt that has underlying collateral. In some cases, however, significant payments may need to be made toward unsecured debts as well.
Chapter 13 is often a good choice for:
- High-income earners
- Those who fail the Chapter 7 means test by having too much discretionary income
- Consumers with assets, such as a home or paid-off car, that they don’t want to lose in a bankruptcy
- Consumers who are facing foreclosure, lawsuits brought on by debtors and collection notices
Many homeowners are relieved to find out that they may be able to save a home that’s in foreclosure by declaring Chapter 13. But at what point in the foreclosure process must you file before it’s too late? As it turns out, you can file for bankruptcy protection well into the foreclosure process and still save your home, according to Florida attorney Ryan Albaugh.
“A debtor can file a case in the morning and stop a sale for the same day, as long as the debtor complies with all needs,” Albaugh said. “They can file a shell Chapter 13 without all the schedules and get a notice to stop the sale.”
What debts are forgiven or discharged under Chapter 13?
Chapter 13 allows for a broader set of forgivable debts than Chapter 7, including:
- Debts caused by willful and malicious damage to property
- Debts due to divorce agreement property settlements
- Debts for funds borrowed under false pretenses
- Debts that were taken on to help pay for tax obligations (the tax obligations themselves are not dischargeable)
Other debts that are dischargeable under Chapter 13 include:
- Medical bills
- Consumer debt
- Personal loans
Debts that are not dischargeable under Chapter 13 include:
- Certain long-term debts, such as a mortgage
- Alimony and child-support debts
- Certain tax debts
- Debts due to DUI
- Guaranteed or government-funded student loans
Who is eligible?
Chapter 13 bankruptcy provides an accessible way for many individuals, including those who are self-employed, to regain control over their debt, even if they don’t qualify for Chapter 7. But not everyone can declare Chapter 13 bankruptcy since there are still qualifications for eligibility.
The first qualification is that you must be employed. “If a person is unemployed, they won’t qualify for the plan because they won’t have sufficient income,” Albaugh said. Additional requirements include:
- Unsecured debt must be less than $394,725 (as of 2018)
- Secured debt must be less than $1,184,200 (as of 2018)
It’s not just the filer’s current situation that determines their eligibility to file for Chapter 13. Some of their actions in the six months leading up to the filing can have a bearing as well. Within 180 days of filing bankruptcy, the filer cannot have:
- Had another bankruptcy petition dismissed for willful failure to appear before the court
- Had another bankruptcy dismissed for failure to comply with orders of the court
How to file Chapter 13 bankruptcy
Credit counseling briefing
Choose an approved provider in the state you’re filing in within the 6 months preceding your filing
Find your court
Depends on the district court in which your state wants you to file
Secure any local forms that are required for your filing
These are forms that are specific to your state and will generally be listed on the website for your local court
Notice Required by 11 U.S.C. § 342(b) for Individuals Filing for Bankruptcy
Forms for the initial petition
Voluntary Petition for Individuals Filing for Bankruptcy
Your Statement About Your Social Security Numbers
Bankruptcy Petition Preparer’s Notice, Declaration and Signature
Disclosure of Compensation of Bankruptcy Petition Preparer
Form 103A (when relevant)
Application for Individuals to Pay the Filing Fee in Installments
Form 101A (when relevant)
Initial Statement About an Eviction Judgment Against You
Form 101B (when relevant)
Statement About Payment of an Eviction Judgment Against You
Certificate from completed credit counseling
A full list of all your creditors
Within 14 days of filing
Declaration About an Individual Debtor’s Schedules
A Summary of Your Assets and Liabilities and Certain Statistical Information
Schedules to 106 listing property, debtors, income, leases, income, expenses and more
Your Statement of Financial Affairs for Individuals Filing for Bankruptcy
Disclosure of Compensation of Attorney For Debtor
Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period
Form 122C-2 (when relevant)
Chapter 13 Calculation of Your Disposable Income (for payment of nonpriority, unsecured debt)
Form 113 (unless your local court differs)
Chapter 13 Plan
Copies of all pay stubs and remittances received during the 60 days preceding the filing
One of the first things consumers need to do before filing bankruptcy is to get a credit counseling briefing from a state-approved provider. It’s required that this is done within the six months before you file. When filing with your spouse, both spouses must have the briefing.
During the briefing, filers will learn alternative options for resolving their debt that can help them avoid filing Chapter 13 bankruptcy. The counseling ranges in price, with online classes offered by some providers for $14.95 per household and one-on-one phone sessions for $50 per person. Lastly, some providers charge an extra fee for the completion certificate sent to the bankruptcy court.
With credit counseling out of the way and a clear decision made to file Chapter 13, the next step is to review the district courts in your state to determine which court should receive your paperwork. After determining the right court, you’ll want to go to their website and download the local forms that the local court requires for your filing, most notably the Chapter 13 Plan, Form 113, which may require the federal form or a local form.
The last step you need to take before petitioning the court is to read Form B2010. This notice gives a brief review of each type of bankruptcy, lists costs associated with filing and lists the debts that cannot be discharged with each type. As of 2018, the cost for Chapter 13 filing and administrative fees totaled $310 (not including attorney fees).
Petitioning the court
After the pre-petition steps are done, it’s time to start completing forms to petition the court and officially file for bankruptcy. For Chapter 13 filers, the process begins with these forms:
- Form 101: Voluntary Petition for Individuals Filing for Bankruptcy
- Form 121: Your Statement About Your Social Security Numbers
- Form 119: Bankruptcy Petition Preparer’s Notice, Declaration and Signature
- Form 2800: Disclosure of Compensation of Bankruptcy Petition Preparer
You can also include several optional forms, when relevant:
- Form 103A: Application for Individuals to Pay the Filing Fee in Installments
- Form 101A: Initial Statement About an Eviction Judgment Against You (individuals)
- Form 101B: Statement About Payment of an Eviction Judgment Against You (individuals)
Finally, you will be asked to submit a list of all your creditor’s names and addresses. Your local court may have its own requirements for formatting of this list, so check their website for instructions.
No more than 14 days after filing
After filing Form 101, you have 14 days to file the rest of the required forms, which are:
- Form 106Dec: Declaration About an Individual Debtor’s Schedules
- Form 106Sum: A Summary of Your Assets and Liabilities and Certain Statistical Information (individuals)
- Forms 106A-J: Schedules to 106 listing property, debtors, income, leases, income, expenses and more
- Form 107: Your Statement of Financial Affairs for Individuals Filing for Bankruptcy (individuals)
- Form 2030: Disclosure of Compensation of Attorney For Debtor
- Form 122C-1: Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period
- Form 122C-2 (when required): Chapter 13 Calculation of Your Disposable Income
- Form 113 (unless your local court differs): Chapter 13 Plan
You will also need to submit copies of all pay stubs and other payment remittances you have received during the 60 days that precede your bankruptcy filing. Check with your court to see if you need to submit these to the court or the trustee.
While it’s not a requirement to file, it should be noted that there is a second financial planning course that must be taken before a filer makes their last payment on the Chapter 13 plan. This course prepares the filer for financial success after the bankruptcy is final, which helps reduce the likelihood that they’ll need to rely on bankruptcy again in the future.
Pros and cons of declaring Chapter 13 bankruptcy
As with any major debt management process, Chapter 13 bankruptcy has both positive and negative aspects to analyze before you proceed. One of the biggest pros for many debtors is that they can usually keep their nonexempt assets when filing a Chapter 13 bankruptcy. Nonexempt assets are generally defined as owned assets that are not necessary to maintain a home or job. These would be property such as a vacation home, a recreational vehicle (RV) or a boat.
Another positive aspect of Chapter 13 is that it stops much of the debt collection, wage garnishment and foreclosure activity against the filer for those debts listed in the bankruptcy. This is especially meaningful for homeowners who want to keep their homes but have fallen behind in payments, including those who currently in foreclosure.
Chapter 13 also makes it easier to repay debt since it effectively consolidates all the listed debt into one payment that can be made to the trustee monthly. In the case of what’s called a “cramdown,” Chapter 13 may even allow a debtor to reduce the amount owed on their secured debt by reducing the balance to match the value of the underlying collateral and effectively reducing the interest.
One of the biggest disadvantages of filing for Chapter 13 is that the value of any nonexempt assets the filer wants to keep can be tallied and used to establish the amount of their responsibility for payment of nonpriority, unsecured debt, such as credit cards and personal loans. The goal here is to ensure that the value of assets that would have been liquidated under a Chapter 7 to pay these unsecured claims are still paid out.
In other words, if you owned a boat valued at $10,000 that would have been sold under a Chapter 7 bankruptcy, then under Chapter 13 you must pay that amount toward nonpriority, unsecured debt. You don’t have to sell the asset to pay that off, but it does increase your overall repayment burden.
For secured debts, the value of the underlying collateral must be paid to those lenders, which can also increase your overall debt burden under the plan. And because the debts take several years to be discharged, the debtor is expected to maintain payments during that time. If they cannot, then they may find their filing dismissed and collections and foreclosure procedures restarting.
“If [a filer] falls behind, then the trustee files a motion to dismiss, which [the filer] would either allow or explain to the judge what happened, and [their] plan for getting back current,” Albaugh said. Without a plan to get back on track, Albaugh said a homeowner could be facing some trouble. “If you were using [Chapter 13] to get caught up on a house, then the foreclosure process starts back up again and you lose that bankruptcy protection,” he said.
Chapter 13 bankruptcy: FAQs
It will erase any eligible debts that are listed in the bankruptcy and paid according to the plan.
On Form 122C-1, filers work through a calculation that determines their commitment period based on their income and state medians. In addition, they may be required to determine their disposable income through Form 122C-2. These two forms establish the payment and the commitment term. But if the filer has nonexempt assets or assets used to secure some of the debt they are listing in the bankruptcy, the value of those assets might be added to the overall payment expectation.
Generally speaking, Chapter 13 is designed for debtors who have assets that they want to keep while still declaring bankruptcy. But, as noted above, the value of certain nonexempt assets or those used to secure debts listed in the bankruptcy may be added to the overall payment. The debtor can decide whether to then liquidate those assets or find other ways to pay off their value.
As long as the filer continues making payments according to the bankruptcy plan, creditors cannot pursue collection activities.
Life after bankruptcy
One of the biggest considerations people make when deciding whether to file for bankruptcy is the potential impact it will have on their future financial lives. While it can certainly help them clear out massive amounts of debt that they couldn’t handle on their own, it can also restrict their ability to take out loans and credit during the payment term of the bankruptcy by requiring them to get the court’s permission first.
Also, after the payment plan is done, a completed Chapter 13 bankruptcy can show on your credit report for up to seven years. As Albaugh noted, however, a filer will usually have already negatively impacted their credit rating through charge-offs, delinquencies, and repossessions before moving on to bankruptcy. In that case, Chapter 13 can actually help the credit restoration process and limit the amount of damage their score will incur.
One positive note to keep in mind is that the more time that passes after your bankruptcy is completed, the less impact it will have on your FICO Score.
There are ways to rebuild your credit after completing Chapter 13 bankruptcy, including by taking out new loans and credit cards. In some cases, these loans might have higher interest rates and credit cards might be secured by an initial payment until the filer re-establishes themselves and improves their credit.
But the most important step to take when rebuilding your credit after bankruptcy is to incorporate the budgeting and financial planning lessons learned in the second bankruptcy course so that you know you are only taking on debt you can manage.
Alternatives to Chapter 13
Although the number of bankruptcy filings since 2005 seems high, not everyone decides to file bankruptcy to deal with their financial issues. There are other options for consumers who find themselves unable to pay off their debts and facing multiple collections actions, and those other options might be a better choice for some consumers. These options include:
As part of the bankruptcy completion, there are two courses you need to take. The first is the pre-filing credit counseling and the second is the pre-discharge debtor education, which is a financial management course before you make your final bankruptcy plan payment. In taking both courses now, before you file, you can learn about a variety of options for debt consolidation and ways to rework your budget and re-prioritize your spending. It’s possible that this re-education can give you the skills and resources you need to create a personal plan for organizing and tackling your debt without filing for bankruptcy.
Some lenders might be open to renegotiating terms with you to reduce interest rates, create payment plans that get you caught up, remove fees and maybe even forgive portions of balances. Just remember that if this happens, you may have tax consequences since forgiven and canceled debts may be taxable. Additionally, according to Albaugh, sometimes settling with creditors on your own requires a lump-sum payment, whereas bankruptcy allows for installment payments on a lowered amount.
If you have assets that are securing debt, you may want to consider voluntarily surrendering them to your creditors to remove debt. For unsecured debts, you may want to consider liquidating your assets, such as RVs, that you own in full and use the proceeds to pay off the debt.
For consumers who can pass the Chapter 7 means test and have no nonexempt assets to protect, Chapter 7 may be a more cost-effective choice. Through a no-asset Chapter 7 filing, your debts can be discharged without payment or liquidations. This gives you a clean slate much faster and, for those with a lower income, can save a lot of money.
Not only does a Chapter 13 filing require a long-term commitment and an understanding of the impact on your credit, but it also carries an expense, as the filer must pay the court, the trustee and their attorney. Before you consider attempting a Chapter 13 without an attorney, note that the U.S. Bankruptcy Court instruction packet states that it is “… extremely difficult to succeed in a Chapter 11, 12 or 13 case without an attorney.”
While attorney fees can run into the thousands of dollars, they generally have installment plans that make it easier for filers to get the expert help they need on a payment plan they can afford. Attorneys also generally offer a free consultation for the initial meeting, which allows you to get to know several attorneys and find the one that you think will get you the best results at a price you can afford.
To start looking for a bankruptcy attorney, you can check with the American Bar Association, as well as state Bar Associations. You can also look for reviews online to help narrow down your choices.