- There are six types of bankruptcy, but Chapter 13 is the most common for individuals.
- Chapter 13 bankruptcy might be right for you if you don’t see any way of getting out from under your debts in your current financial situation.
- Bankruptcy is a complex legal process that an attorney can help guide you through.
- In the end, bankruptcy can serve as a reset but does come with long-term consequences.
Bankruptcy is a scary and abstract concept for many, but bankruptcy, and specifically Chapter 13 bankruptcy, can be an effective path out for some who find themselves under a crushing burden of debt. Chapter 13 bankruptcy is a legal process where you form a plan to pay off all your debts within a set time frame.
Bankruptcy doesn’t mean that all your debts disappear, but it can be used as a way to pare down debts and work with your lenders to reach a compromise. Bankruptcy will also affect your credit score for years afterwards, making it more difficult to make any major purchases in that time frame.
Let’s explore exactly what bankruptcy looks like and how the process works.
Inside this article
What is Chapter 13 bankruptcy?
The United States Code of Bankruptcy created six types of bankruptcy, but three are most commonly used: Chapters 7, 11, and 13. Chapter 7 is considered a “liquidation” bankruptcy, but Chapters 11 and 13 are considered “reorganization” bankruptcies and are used to plan ways that corporate and individual debtors respectively can pay off looming debts. We’ll discuss Chapter 13 bankruptcy here.
Chapter 13 bankruptcy is also called “a wage earner’s plan” and is used to create a framework where you can pay off your creditors over three to five years. Some of the major ways that Chapter 13 differs from Chapter 7 is that you have the opportunity to save your home from foreclosure, reorganize secured debts (debts where you have put up property as collateral), and essentially consolidate all your loans.
Chapter 13 is for individuals that have unsecured debt of less than $394,725 and secured debts less than $1,184,200—numbers based on the consumer price index.
How does Chapter 13 bankruptcy work?
Bankruptcy could be the right choice if your debts are overwhelming and you see no way to repay them based on your current financial situation. If you have already tried everything else, including negotiating with your lenders and seeing a credit counselor, or if you’re facing serious financial fallout from a divorce, Chapter 13 might be the right choice.
So you’ve decided to file for Chapter 13 bankruptcy. What does the process look like?
Step 1: Find an attorney.
First off, you’ll likely want to find an attorney who specializes in bankruptcy law. You can use the American Bar Association’s Find Legal Help tool to find a lawyer—they even have sources of free legal help for low-income clients. You can file for bankruptcy without an attorney, but that’s not recommended. Having someone with deep legal expertise on your side in the courtroom will be invaluable.
“Attorney representation is always recommended as the Chapter 13 process is not easily navigated by pro se debtors,” says Gregory Stern, principal with Gregory K. Stern, P.C., a Chicago-based firm specialized in bankruptcy and foreclosure litigation. “There are many considerations and nuances that are best navigated by experienced counsel. Chapter 13s are best used in specific situations, such as where there is a mortgage payment default or when the debtor’s income exceeds median income after completion of the means test.”
Step 2: File the petition.
The petition is paperwork that lays out all of your debts, income, property, and proof that you’ve exhausted all your other options before coming to bankruptcy court. Here’s what you’ll need to compile:
A list of all your debts: who you owe, how much, and what for
Information on and proof of income: how much are you paid, when you get paid, employer information, and a paystub from the last 60 days if applicable
A list of all your property: cars, homes, etc.
Information on qualifying education or tuition account interest
A detailed account of your monthly living expenses: rent or mortgage, utilities, transportation and food costs, medical expenses, etc.
A certificate of credit counseling and any debt repayment plan developed through that counseling
Most recent tax return and any tax returns filed during the case
If you’re married, whether or not you’re filing with your spouse, you’ll need to provide all of this information for them as well, so that the court can see the entire picture of your household financial situation
A $235 case filing fee and a $75 miscellaneous administrative fee—these can be paid in installments if the court allows
A repayment plan—you can either submit this with your petition or within 14 days of filing—that details the payments you will make over the next three to five years to the trustee who will then distribute them to your creditors
Step 3: Wait to be assigned a trustee by the court.
As soon as you file for bankruptcy, you will be assigned an impartial trustee and all of your debts will be put on hold. Your wages will not be garnished, lawsuits will be halted, and those horrible calls will stop. If your home is under foreclosure, that process will halt as well, though you must continue making your payments. This serves as a kind of “time-out” during which you and your creditors can hopefully arrive at a compromise under the court’s supervision.
Step 4: Attend a meeting with your trustee.
Within the next few weeks (21 to 50 days, officially), your trustee will call a meeting for all the people and companies to whom you owe money. You will be put under oath and asked by the trustee and your creditors about your financial situation and your plan to repay.
This process is likely to go smoothly if you have ensured that your original petition was complete and accurate and you have consulted with the trustee before this meeting. This is an opportunity for the people and companies to whom you owe money to resolve any issues they see with your repayment plan. The judge won’t be at this meeting, so he or she can remain impartial.
Step 5: Go to court.
After this meeting, you, your trustee, and your creditors at their discretion head to court for a Chapter 13 plan and confirmation hearing. If 30 days have passed since you filed your petition and there’s still no court ruling, you have to start making your proposed payments to the trustee, but the hearing is required to be held within 45 days of your meeting with your creditors.
The bankruptcy judge will review the plan and decide if it meets the standards of the bankruptcy code and if it appears doable for you. If the judge or your creditors have issues with the plan, there could be changes. But according to Stern, most hearings proceed without pushback.
“The majority of confirmation hearings are rather perfunctory and largely based upon the trustee’s recommendation—either the trustee recommends or doesn’t recommend confirmation,” Stern explains. “I would venture that 99 percent of trustee-recommended cases for confirmation are confirmed.” Once the judge confirms the plan, you will begin making the payments to the trustee as soon as possible.
Life after Chapter 13 bankruptcy
So the judge has signed off on your repayment plan, no one objected, and you’ve sent off your first payment to the trustee. What does life look like after bankruptcy?
First of all, you have to stay on top of your repayment plan. You will need to live on a limited budget for three to five years, making your payments to your trustee as scheduled. You can make these payments with payroll deductions to simplify the process and ensure your payments are on time. During this timeframe, you can’t take out new debt without consulting your trustee.
At the end of your payment plan, if all has gone smoothly, the court will discharge your debts. In order to discharge your debts, you must have:
Completed all of your payments on time
Completed an approved financial management course
Certified that all domestic support obligations have been paid
Not received a discharge within the last two years for a prior Chapter 13 case
If the court determines you have met all your obligations, they will discharge the debts covered in your repayment plan.
If the repayment plan went off course through no fault of your own, you might receive a hardship discharge. This is most often granted when you have a long-term injury or illness that would prevent you from working and repaying your debts.
While your repayment plan and creditors are likely to disappear after three to five years, your bankruptcy will continue to follow you for seven years on your credit report. This is a good time to focus on improving your credit score overall by monitoring your credit reports, making and following a budget, and developing healthy borrowing habits, perhaps with a secured credit line.
You might be a good candidate for a Chapter 13 bankruptcy if you are no longer able to stay afloat because of massive debts. Say you have $400,000 in debt on various credit cards as well as a $600,000 mortgage. Your credit card debt is ballooning and you can’t make your house payments.
Instead of losing your house and letting all of your accounts go to collections, you can seek out an attorney who can guide you through the process. You will compile all the necessary information and file a petition for Chapter 13 bankruptcy. After all the paperwork is filed, all your debt will be put on hold and you will hear from your appointed trustee.
Your trustee will call a meeting. You, your lawyer, and representatives from the companies to which you owe money will be there. You will testify truthfully about your current financial situation and make it clear that you’re simply not able to fully repay your debts. This is a time where you and your credit card and mortgage creditors can find a repayment plan that you all agree on.
Once you reach an agreement, you will have a confirmation hearing with an impartial judge. If everything has been filed correctly and meets the legal standards of Chapter 13 bankruptcy, your repayment plan will be approved and you’ll need to start making the payments you agreed upon as quickly as possible.
The repayment plan will last from three to five years. During that time your primary focus should be making the agreed-upon payments on time. You will likely have to live on a limited budget and because of the hit to your credit score, you probably won’t be making any major purchases. But eventually, you will make the final payment and the remainder of your debt will be discharged.
At that point, you just have to wait seven years from the date you filed for bankruptcy for it to fall off your credit score. Hopefully you’ve learned a lot about wise spending and responsible borrowing and will be able to enjoy a fresh start!
What’s the difference between Chapter 7 and Chapter 13 bankruptcies?
Chapter 7 is known as a liquidation bankruptcy, where all your nonexempt possessions will be sold to repay your creditors as much as possible. You won’t have a long-term payment plan. Chapter 13 is known as a reorganization bankruptcy and it will allow you the opportunity to save your possessions (like your home and car) while finding a three to five year plan to repay your creditors.
How long does a Chapter 13 bankruptcy stay on your credit report?
It takes seven years for a Chapter 13 bankruptcy to fall off your credit report.
Who can declare Chapter 13 bankruptcy?
Individuals (not businesses) can declare Chapter 13 bankruptcy if their unsecured debts are less than $465,275 and their secured debts are less than $1,395,875.