Chapter 13 may be an option to start over financially if you earn too much money to quality for Chapter 7 or don’t want to sell off your assets. A successful repayment plan can help you get back on on a more manageable path to stability in three to five years.
How does Chapter 13 bankruptcy work?
Chapter 13 is sometimes called a wage-earner’s plan, because it allows you to keep important assets — like your home — as you work with creditors on other types of consumer debt.
After you attend a required credit counseling session and file your paperwork, you’re given 14 days to design and submit a payment plan for the court to approve. Your payment plan is built around your monthly income and expenses, priority debts and nonexempt assets. And you’ll start repayments based on it right away, even before the judge gives it the green light.
To help with your case, the court hires an independent trustee, who accepts your monthly payments and distributes it to your creditors. You’re also granted an automatic stay from collection agencies and creditors, which can provide the breathing room you need to focus on steadier finances.
After three to five years, depending on your plan, your debt is discharged if you’ve faithfully kept up with expected payments and monthly bills.
Is Chapter 13 bankruptcy right for me?
If you have a steady income, aren’t willing to part with your assets and believe there’s no other way for you to repay your existing debt, Chapter 13 bankruptcy might be right for you.
Some people choose Chapter 13 because they aren’t able to meet the means test required to file for Chapter 7 — in other words, they make too much money to qualify for liquidation.
To help determine your chances of success, take advantage of a free consultation with a credit counselor or bankruptcy attorney. You might find that a less burdened financial future is worth the time and effort.
How to file for Chapter 13 bankruptcy
Bankruptcy is as involved as any government process, but you’ll need to follow general steps to succeed in your claim.
- Complete the necessary paperwork.
When filing, you’ll submit more than 15 official bankruptcy forms to the government. These forms contain the details necessary to get the process rolling, including income and payment schedules, a list of your assets and your tax history.
- File the petition.
Visit your local courthouse to submit your paperwork and file the official claim. Expect to pay about $310 in administrative fees.
- Submit a payment plan.
Submit a payment plan to the court within 14 days of filing your claim.
- Faithfully make your monthly payment.
If your payment plan is approved, commit to paying the agreed monthly payment to your trustee. The trustee will distribute the money to your creditors.
- Attend a debt-education course.
A requirement of Chapter 13 is attending a class on debt before your payment plan is fully satisfied. Your trustee should provide a list of nonprofits offering classes designed to keep you out of future debt.
Should I hire a lawyer?
An attorney can provide the expertise necessary to navigate the requirements of the court and design a payment plan that protects your assets and best meets your goals.
Chapter 13 is among the more complicated bankruptcy choices, and courts are known to throw out filings for the slightest discrepancies in forms and schedules. Very few Chapter 13 cases have been successful without the involvement of an attorney.
Do I qualify for Chapter 13 bankruptcy?
To qualify for Chapter 13 bankruptcy, you must meet requirements that include:
- Proof of a regular income.
- Secured debt of up to $1,184,200.
- Unsecured debt of up to $394,725.
- Up-to-date tax filings.
- No history of a Chapter 7 filing in the past four years or Chapter 13 in the past two.
Types of debt Chapter 13 bankruptcy covers
- Older non-priority income tax
How will Chapter 13 bankruptcy affect my credit?
A Chapter 13 bankruptcy stays on your credit report for seven years, which can make approval for credit cards, loans and other borrowing difficult.
But if you commit to your approved payment plan and make good financial decisions in the future, you can rebuild your credit score with time.
Alternatives to Chapter 13 bankruptcy
Bankruptcy should be the last resort if your finances are unsteady. A financial professional can help you take an unbiased look at your income and debts to learn whether restructuring your finances into a leaner, more efficient budget is doable on your own.
You might find that liquidating some of your assets — extra cars or a rented office you’re not using — could turn up enough cash to get the repayment ball rolling without stepping foot into a courtroom.
If you’re not comfortable with calling your creditors, a debt-relief company may be able to negotiate your debt and restructure your existing loan repayments to ease some of the immediate stress you’re experiencing. And possibly render Chapter 13 unnecessary.
Compare debt relief companies
Before you sign up with a debt relief company
Debt relief companies typically charge a percentage of a customer’s debt or a monthly program fee for their services. And not all companies are transparent about these costs or drawbacks that can negatively affect your credit score. Depending on the company you work with, you might pay other fees for third-party settlement services or setting up new accounts, which can leave you in a worse situation than when you signed up.
Consider alternatives before signing up with a debt relief company:
- Payment extensions. Companies you owe may be willing to extend your payment due date or put you on a longer payment plan if you ask.
- Nonprofit credit counseling. Look for free debt-management help from nonprofit organizations like the National Foundation for Credit Counseling.
- Debt settlement. If you can manage to pay a portion of the bill, offer the collection agency a one-time payment as a settlement. Collection agencies are often willing to accept a lower payment on your debt to close the account.
Chapter 13 can help you maintain important assets while restructuring your finances. But it requires strict discipline and it can stay on your credit report for seven years.
Speak with a professional to consider all options, including the help of a debt-relief company, first. If your debts aren’t too excessive, a debt consolidation loan or balance transfer credit card might provide the breathing room you need to get back on your feet. Learn more and read our bankruptcy guide.
Frequently asked questions