Bankruptcy / Chapter 13

Chapter 13 Bankruptcy: 9 Things You Need to Know

Written by Ben Tejes
Updated Oct 11th, 2023
This article is for informational purposes only. Ascend does not provide legal advice, and are not attorneys. If you'd like to speak with a bankruptcy attorney that serves your city, you can speak with one in a free consultation.

You may be experiencing the stress that comes with financial hardship and are considering a Chapter 13 bankruptcy. According to the American Bankruptcy Institute, only 38.8% of Chapter 13 bankruptcy ends in a discharge. That number drops drastically to just 2.3% if you are filing a Chapter 13 bankruptcy pro se (without an attorney).

So, Chapter 13 bankruptcy is complex, so it's important to understand the nuance behind Chapter 13 bankruptcy.

The purpose of this article is to inform you about the most important things about Chapter 13 bankruptcy. Here's what we will cover:
  1. Your Chapter 13 Payment Plan Estimate
  2. Chapter 13 Pros and Cons
  3. Chapter 13 Bankruptcy Eligibility
  4. How Chapter 13 Bankruptcy Works
  5. Understanding Chapter 13 Bankruptcy in Your State
Two types of bankruptcies are most common to the consumer: Chapter 7 vs Chapter 13 bankruptcy. Chapter 13 Bankruptcy, also referred to as the wage earners bankruptcy offers debt adjustments for those with regular incomes. Many people consider a Chapter 13 Bankruptcy because they do not qualify for a Chapter 7 Bankruptcy. Sometimes, consumers have too many assets that would not be covered by bankruptcy exemptions.

Chapter 13 Bankruptcy Introduction

The Chapter 13 Bankruptcy IRS code might be a vital tool for individuals that have debt that is unmanageable and have assets that exceed federal and/or state bankruptcy exemptions or do not qualify for a Chapter 7 bankruptcy. The Chapter 13 bankruptcy also may allow you to protect your property from foreclosure.

That said, it’s important to understand the homestead exemptions and other exemptions in your state. For example, if your home equity is below the homestead equity exemption for your state and you are able to keep your vehicle in bankruptcy, a Chapter 7 bankruptcy may be a more attractive option. That is why you may wish to take a Chapter 7 bankruptcy means test calculator just to see whether you may qualify. The results email provides the estimated homestead exemptions for your state for you to compare against your assets.

Okay. Let’s discuss the nuts and bolts of A Chapter 13 bankruptcy. Chapter 13 bankruptcy provides a chance for individuals to reorganize their secured debt aside from the mortgage for their main home. It allows them to lower their debt payments during the agreed-upon duration as filed. Chapter 13 Bankruptcy also protects the debtor from creditor or debt collector harassment. It also acts as a provision for loan consolidation where the debtor goes through a trustee who facilitates payment distribution to creditors. Chapter 13 Bankruptcy guidelines indicate that there should not be direct contact between debtor and creditors.

The introduction of an intermediary (the Chapter 13 trustee) to the process removes the pressure from the debtor. Creditors are no longer breathing down his/her neck demanding payments. It also facilitates proper and professional management of the debt portfolio. It highlights the protective approach of the Chapter 13 Bankruptcy code guidelines designed to protect debtors.

Also, note that the bankruptcy code does not mean that the debt burden of the debtor is abolished. Rather, it provides options that make it easier for the debtor to pay off his debts. Hence, why consolidation and trustees come into play.

Estimating Your Chapter 13 Payment

You will have a monthly payment in a Chapter 13 payment. The calculation uses complex bankruptcy forms. Ascend created a straightforward Chapter 13 bankruptcy calculator based on the forms to estimate your Chapter 13 monthly payment. The courts reference the latest May 15, 2021 means testing data here, which we also incorporate into our Chapter 13 calculator.

The Chapter 13 calculator also allows you to compare against a Chapter 7 bankruptcy along with other debt-relief options such as debt management or debt settlement. IMPORTANT: If the Chapter 13 disposable income test shows that your disposable income is high, it may show a very expensive monthly payment. We would be happy to walk through what that means with you or discuss the information.

Important things to note about the calculator:
  1. Takes about 3-5 minutes to complete.
  2. Compares 5 different debt relief options including Chapter 7 bankruptcy
  3. Uses bankruptcy forms and bankruptcy means test data for filings on or after May 1, 2020
  4. Gives the best estimate given from the information provided.
  5. The estimate is based on your information today. Your Chapter 13 plan payment could increase if you make extra income.
  6. It is 100% free. Only an email is mandatory to provide the estimates to you. How does Ascend make money? We receive donations and small referral fees from different providers.

Chapter 13 Bankruptcy Advantages:

Chapter 13 Bankruptcy guidelines offer numerous advantages making it quite appealing and useful to anyone who might file for bankruptcy. You should consider Chapter 13 bankruptcy pros and cons.

  • Perhaps the most attractive aspect of a Chapter 13 bankruptcy is protecting from home foreclosure. The home is perhaps most people’s most valuable possession. Loss of your home because of debt can be devastating. When a debtor files for bankruptcy under Chapter 13, the court guarantees not to auction the home.
  • It allows debtors to reschedule their debt. Every debt is subject to a fixed duration for repayment. Most people facing bankruptcy can no longer pay off their debts within the stipulated duration. However, the Chapter 13 Bankruptcy code allows the debtor to reschedule secured debt so that it extends into the duration provided under the Chapter 13 bankruptcy filing. It gives a chance for the debtor to work towards clearing those debts.
  • Lower payments. A rescheduled debt and expanded debt duration are advantageous for the debtor because it might help lower the payments. It will allow the debtor to pay less in monthly installments so that he/she has access to more funds that can then be used in other areas. These include upkeep and paying off bills.

Other Advantages to Consider

  • Third-party protection. The Chapter 13 bankruptcy code is also ideal because it protects third parties that have co-signed to a loan. It means that the creditors will not go for the co-signer in case the debtor fails to pay. Third parties will thus not find themselves in trouble in case the person they co-signed with ends up being bankrupt. The aim here is to avoid inconveniencing others.
  • Chapter 13 consolidates the debt to act as a single loan handled by a trustee. It means that the trustee receives payment from the debtor who then distributes the received amount to the creditors. The trustee also eliminates the need for direct contact between the debtor and the creditors.
  • In some cases, a Chapter 13 bankruptcy can help lower your vehicle's interest rate or balance owed.
  • A Chapter 13 bankruptcy can stop evictions.

Chapter 13 Bankruptcy Disadvantages:

Before deciding to file, you should consider the Chapter 13 horror stories and determine whether you are at risk. So, let's cover some of the downsides to filing for Chapter 13 Bankruptcy. 

You may want to read our article covering whether Chapter 13 is worth it and also the common reasons are for Chapter 13 dismissal and see whether you may be at risk before you start a Chapter 13 payment plan.

Chapter 13 Bankruptcy Eligibility:

Not everyone that is approaching bankruptcy can file under Chapter 13, so it is essential to understand the required criteria for one to qualify. The Chapter 13 Bankruptcy, therefore, provides clear guidelines that allow individuals to determine whether they qualify to file for bankruptcy under this specific code. Anyone can file for Chapter 13 bankruptcy if they have less than $419,275 in unsecured debt and less than $1,257,850 in secured debt. The Chapter 13 debt limits are regularly adjusted with changes to the consumer price index. We created a Chapter 13 Calculator to help you estimate your plan payment

Note that individuals may forfeit eligibility if they fail to show up in court within 180 days before filing a bankruptcy petition. Also, if they do not comply with the court orders regarding their filing, they may be disqualified.  Finally, if individuals fail to attend credit counseling within 180 days prior to filing for bankruptcy, then they can also become ineligible.

Note that an authorized counseling agency should handle credit counseling. However, there are exceptions. For example, in an emergency where the debtor has limited time, or when there are few credit counseling agencies. Debtors need to file their debt management plans with the court. The debtor drafts the debt management plan during the period of debt counseling, preferably with help or guidance from a debt counseling firm.

How Chapter 13 Bankruptcy Works:

Individuals start the Chapter 13 bankruptcy process by filing a petition with a local bankruptcy court. The individual will need to provide personal financial details. For example, unexpired leases, incomes, and expenditures to include assets & liabilities, and tax return transcripts.

Filers also need to submit a credit counseling certificate accompanied by a debt repayment plan. In addition, administrative fees apply. For example, a $235 fee for case filing and a $75 fee to cover miscellaneous administrative expenses.

Chapter 13 Bankruptcy Process

You may want to read our more in-depth article on the Chapter 13 bankruptcy process, but we’d like to provide some information here. First,y you should determine whether you need to hire a bankruptcy attorney. Many people hire a Chapter 13 bankruptcy attorney when filing. In fact, in a recent study, only 2.3% of Chapter 13 bankruptcies filed were successful when the individual filed without a bankruptcy lawyer.

The Chapter 13 and Chapter 7 Bankruptcy code are designed to provide provisions for anyone that is facing a cash crunch. However, Chapter 13 bankruptcy is the one most people opt for when they want to avoid foreclosure on their homes.

So here is how it works. If you have tried negotiating with creditors, but all else has failed, then perhaps your last resort should be filing for bankruptcy.  While the Chapter 7 bankruptcy code forces you to do away with your assets in order to settle your debts, Chapter 13 lets you keep your belongings.

Pursuing this option is a good idea when creditors start forcing you into a corner by filing lawsuits or attempting to repossess your belongings. However, keep in mind that filing for bankruptcy will severely hurt your credit score and maintain it like that for at least ten years. Filing bankruptcy under Chapter 13 provides you with more time to pay off the debts.  

The process of filing for Chapter 13 bankruptcy is quite elaborate.
  • The debtor begins by filing a bankruptcy petition with a local bankruptcy court.
  • Debtors must state their assets and liabilities.
  • They must also submit a schedule of their income and expenditures.
  • A schedule of unexpired leases and executory contracts should also be provided.
  • The debtor must provide a statement of financial affairs.
A filing must also accompany the above requirements for credit counseling as well as any evidence to prove payment from employers. The debtor should also provide tax return transcripts to their trustee who will handle any dealings with the creditors.

The Chapter 13 Bankruptcy Plan and Confirmation Hearing

A debtor must submit a repayment plan when filing for bankruptcy. This filing can be made together with an extension petition if the court does not award the extension at first. It can also be filed within 14 days after the filing of the petition. The payment plan should show fixed payment plans that will be sent to the trustee. These fixed payments can be sent bi-weekly or on a monthly basis. The trustee distributes the funds to the creditors, as indicated in the payment plan.

Chapter 13 bankruptcy code protects the debtor from losing vital property. For example, a house. If the debtor owns a business, the payment plan includes the business’ disposable income. However, the plan omits the operating expenses needed to run the business.

The debtor begins making payments to the trustee within 30 days after filing for Chapter 13 bankruptcy even if the court has not yet approved the plan. The trustee starts distributing the funds to the creditors as soon as the court approves the plan.
If the court rejects a repayment plan, the debtor files a modified plan. The debtor also has the option of converting the case into a Chapter 7 Liquidation case. If the court again rejects the modified plan, the trustee returns the funds (minus a small sum to cover costs) to the debtor.

How to be successful in a Chapter 13 Bankruptcy

The debtor and creditors must honor the provisions of the court-approved plan. The debtor must follow through with the plan by sending regular payments to the trustee. In addition, the debtor is prohibited from accumulating new debt during the bankruptcy period without notifying the trustee. This is because new debt might derail the debtor from his initial plan.

The debtor may choose to have the payments deducted directly from his/her payroll. The upside is that this decreases the chances of defaulting, meaning the payments will be made on time. In case the debtor fails to make payments as indicated in the plan, then the bankruptcy court may liquidate the case and dismiss it as per the bankruptcy code. If the debtor cannot pay domestic support payments, the court may dismiss the case or convert it into a liquidation case. These domestic support payments include alimony or child support. The same fate may befall the debtor’s case if he/she fails to submit tax filings.

Chapter 13 Discharge and completion

Discharge as per the Chapter 13 Bankruptcy code is a complicated affair, and it went through some changes recently. The debtor is supposed to consult legal counsel before filing under Chapter 13. Individuals are discharged from the bankruptcy status immediately upon finalizing all the payments as indicated in the payment plan. The debtor has to confirm that domestic support obligations involved in the filing prior to the certification have been cleared.
The debtor should also not have been discharged in a previous case in which a filing was made within a particular duration. Two years if it was a Chapter 13 case and four years if it involved Chapters 7, 11, and 12 filings. Prior to being discharged, the debtor is also supposed to have gone through and completed a financial management course.

Understand Chapter 13 Specifics By Your State

You are nearing the end of this article, so it’s important to understand the unique aspects of filing Chapter 13 in your state. See one of the guides below that will be helpful to understand your state’s dynamics.

District of Columbia
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Rhode Island
South Carolina
South Dakota
West Virginia

Other things to consider

The bankruptcy court does not approve a discharge prior to determining whether there are incomplete procedures that may stand in the way as far as the debtor’s homestead exemption is concerned. If a debtor that had filed for bankruptcy under the Chapter 13 code receives a discharge, this means that they have cleared all the debts that were highlighted in the payment plan presented in the filing. Therefore, the creditors that were listed in the Chapter 13 bankruptcy filing can no longer demand payment from the debtor unless it is a post-bankruptcy transaction.

Keep in mind that the Chapter 13 Bankruptcy filing does not discharge some debts. They include long-term debt obligations such as education loans, specific taxes, alimony, child support, and mortgages.

There is also the Chapter 13 Hardship Discharge. This discharge describes a situation where the debtor requests the court to grant him/her a discharge if the debtor is unable to complete the plan. This may happen when the plan is confirmed, but the debtor is unable to complete the plan due to various circumstances. For example, a debtor might be unable to pay due to circumstances beyond his/her control. It may be due to illness or injury that leads to insufficient funds to pay off the remaining debt.