Chapter 13 Bankruptcy: What It Is, How It Works, and When It May Help
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Chapter 13 bankruptcy is my favorite chapter of bankruptcy because of how many different problems it can solve. I don't think of Chapter 13 primarily as the bankruptcy for people who can't file Chapter 7 . I think of Chapter 13 bankruptcy as a chapter that can buy you time when time could really help you solve your financial problems. Chapter 13 allows people with regular income to reorganize their debts through a court-approved repayment plan that usually lasts three to five years. But that simple definition doesn't really explain why Chapter 13 can be so useful.
People's financial situations can change quickly. Someone who can afford their $2,300 monthly mortgage payment today, may not have been able to afford it six months ago. Now making the mortgage payment may not be the problem, but that same person may not have a way to make up several months of missed mortgage payments while possibly getting foreclosure pressure from their lender. Someone else's income may make it difficult to qualify for a discharge in Chapter 7 but they may still be buried in credit-card debt. Another person may own a home with enough equity that filing Chapter 7 could create a totally different problem. Chapter 13 can help resolve these types of issues.
"I would say the majority of my Chapter 13 cases are filed because the person or family went through a tough spot and got behind on important obligations," said Ben Wright, a fellow bankruptcy attorney in Phoenix and contributor here at USBankruptcyHelp.com. "Their financial situation may have improved, but they still need a way to deal with what happened while things were bad." That has also been my experience with many Chapter 13 cases.
Chapter 13 Bankruptcy at a Glance
Chapter 13 bankruptcy uses a court-approved repayment plan to give people with regular income time and structure to address debts and protect property.
- What it is: Chapter 13 is a federal bankruptcy process that allows individuals with regular income to propose a repayment plan under Chapter 13 of the U.S. Bankruptcy Code.
- How long it usually lasts: Most Chapter 13 repayment plans last three to five years, depending on income, plan requirements, and the debts that must be handled through the plan.
- How payments work: You typically make one monthly payment to a Chapter 13 trustee, who distributes money to creditors under the court-approved plan.
- Why people use it: Chapter 13 may help stop foreclosure, address missed mortgage or car payments, manage certain tax debts, or protect property that could be at risk in Chapter 7. In some cases, it may also help prevent repossession of a vehicle.
- What filing can stop: Filing bankruptcy usually creates an automatic stay that pauses many collection actions under 11 U.S.C. § 362, although exceptions and limits may apply.
- What happens at the end: If you complete the repayment plan and meet all required obligations, certain remaining eligible debts may be discharged under 11 U.S.C. § 1328.
- The key question: Chapter 13 is not just about whether you can file. The real question is whether it solves the financial problem you actually have and whether the resulting plan payment is realistic.
When Chapter 13 Bankruptcy May Make Sense
When I sit down with a client or potential client, Chapter 13 becomes a strong candidate when I see things like arrearages for property they want to keep, property that isn't covered by a bankruptcy exemption, types of debt that can't be discharged in chapter 7 (like some taxes and domestic support) or income that may not pass the means test.
Here are some of the situations that make me take a closer look at Chapter 13 bankruptcy:
- You can afford your mortgage right now, but you can't catch up on missed payments. Chapter 13 may allow you to spread mortgage arrears over the life of the plan and avoid foreclosure while you resume your regular mortgage payments.
- You're behind on a vehicle you want to keep. Chapter 13 can give you a way to deal with missed car payments and prevent or even address repossession.
- You have assets that would not be exempt or protected in Chapter 7. A person may have a lot of equity in a home, vehicle, or other property that is not fully protected by a bankruptcy exemption. Chapter 13 can allow you a way to protect property that is not exempt by paying through the 3 to 5 year plan what bankruptcy law requires.
- You don't qualify for Chapter 7 because of your income. Some people have enough income to create a Chapter 7 means-test or qualification issue but still do not have a realistic way to pay all of their debts outside bankruptcy.
- You owe debts that can't be discharged in Chapter 7. Certain tax debt, domestic support arrears, and certain other obligations may need to be paid or treated in a particular way. Chapter 13 can provide a structure for doing that over the life of the Chapter 13 plan.
Should You File Chapter 7 or Chapter 13 Bankruptcy?
When I sit down with a client or potential client and compare Chapter 7 vs Chapter 13 bankruptcy, I usually start by asking what problems the person would like bankruptcy to solve. If the main issue is unsecured debt (like credit cards and medical bills) and a Chapter 7 discharge could eliminate that debt without important assets at risk (like their home), Chapter 7 may be the better solution. However if the person needs time to catch up on obligations, needs to protect property, or has debt that cannot be addressed by a discharge, Chapter 13 starts to become more interesting as a solution.
The table below shows some of the differences I compare. There isn't a single row that determines which chapter is the right chapter, but viewed together they can help show how one chapter can resolve a problem that the other can't.
| Category | Chapter 7 | Chapter 13 |
|---|---|---|
| Length of Case | Usually completed within a few months. | Usually lasts three to five years. |
| Repayment Plan | No court-approved repayment plan. | Requires a court-approved repayment plan. |
| Income | Many filers must satisfy the Chapter 7 means test, although exceptions can apply. | You need regular income sufficient to fund a feasible Chapter 13 plan. |
| Property | Nonexempt property may be sold or otherwise administered by the Chapter 7 trustee for the benefit of creditors. | You may be able to keep nonexempt property, but the plan may have to pay unsecured creditors at least what they would have received in a Chapter 7 case. |
| Missed Mortgage or Car Payments | Chapter 7 does not provide a multi-year repayment plan for curing mortgage or vehicle arrears. | Chapter 13 may allow certain arrears to be paid over the life of the plan while you keep the property. |
| When I Usually Look at It | When the main goal is to discharge qualifying debt relatively quickly and there is no major property, arrearage, or eligibility problem that Chapter 7 cannot address. | When someone needs time to catch up, needs to protect property, has an income issue under Chapter 7, or needs to reorganize debts that cannot simply be discharged. |
If you want a more detailed comparison of the differences, see our guide on Chapter 7 vs Chapter 13 bankruptcy.
Deciding between Chapter 7 and Chapter 13 usually requires looking at several parts of your financial situation together, not just your income. I built the free Chapter 7 vs Chapter 13 decision tool below around many of the same issues I look at when comparing the two chapters, including your income, property, possible foreclosure or vehicle repossession, and what you are trying to accomplish through bankruptcy.
The tool does not determine which chapter you should file or provide legal advice. Instead, it walks you through those decision points and gives you an educational result explaining which chapter may be a better fit based on the information you entered. You do not need to provide your name, email address, or phone number to use the tool, and the financial information you enter is not saved after you leave or refresh the tool.
Chapter 7 vs Chapter 13 Decision Tool
Answer a few questions to get an educational estimate of which bankruptcy chapter may fit your situation.
Step 1 of 2
Window 1 of 2: Income Snapshot
ZIP lookup is optional and used as a quick state check.
What Is a Chapter 13 Bankruptcy Plan?
A Chapter 13 plan is the roadmap for how your debts will be handled during your bankruptcy case. You file the Chapter 13 plan with the bankruptcy court, the Chapter 13 trustee as well as all of your creditors receive a copy of the plan and have time to review and object to it. Ultimately the bankruptcy court decides whether your plan meets all the requirements to be confirmed. In my experience confirmation is usually done through a stipulated order between me, representing the filer (or "Debtor") and the Chapter 13 trustee, once all objections have been resolved. Procedures vary by jurisdiction, however, and some cases require a confirmation hearing where the court resolves disputed issues before the plan can be confirmed. Either way, the bankruptcy court ultimately decides whether the plan will be confirmed.
The Chapter 13 plan is where Chapter 13 becomes more individualized or where "the rubber meets the road." The Bankruptcy Code determines what certain creditors must receive. The Chapter 13 plan has to stay within those rules and apply them to your income, property, debts and financial goals.
For example, assume we have a homeowner who is $15,000 behind on their mortgage, owes $10,000 in priority tax debt, has $50,000 in credit-card debt and has enough income to make their regular monthly mortgage payment. Their Chapter 13 plan might provide for the $15,000 in mortgage arrears to be caught up over the life of the plan and pay the priority tax debt. Some unsecured claims may receive a fraction of what they're owed, or even nothing at all, with eligible unpaid balances discharged after successful completion of the plan. The homeowner would generally also have to keep making their regular monthly mortgage payment while their case is active. In the past the filer would be responsible for making the mortgage payment directly to their mortgage lender, but more recently I have seen filers required to make their mortgage payment through the bankruptcy trustee. This is called a "conduit plan payment."
This example illustrates how different types of creditors are treated in Chapter 13. Some creditors have to be paid in full, some creditors may only need their arrearage cured, and some unsecured claims may only receive a fraction of what they're owed or even no nothing at all, with eligible unpaid balances discharged after successful completion of the plan. The exact treatment depends on the type of debt, your income and expenses, your property and exemptions, the terms of the proposed plan, and applicable bankruptcy law and local practice. The court must ultimately confirm the plan before it becomes the governing repayment plan in the case.
If you want to see what an actual Chapter 13 plan looks like, the U.S. Courts provides an official Chapter 13 Plan form . Local bankruptcy courts may use different forms, additional provisions, or district-specific procedures.
How Different Debts Are Treated in a Chapter 13 Plan
As we saw above, a Chapter 13 plan treats different debts in different ways. Bankruptcy law divides claims into different categories and gives some claims rights or priority that others don't get. The rules governing a Chapter 13 plan are found primarily in 11 U.S.C. § 1322 , while 11 U.S.C. § 1325 covers many of the requirements a Chapter 13 plan must satisfy before the bankruptcy court can confirm it. 11 U.S.C. § 507 identifies debts that receive priority treatment.
If you read the code I've linked you may see the word "claim" instead of "debt." A claim is essentially a creditor's right to payment defined in 11 U.S.C. § 101(5) . Creditors generally assert what they are owed in a bankruptcy case by filing a proof of claim, which tells the court the amount they believe is owed and the basis for their claim.
The table below shows how some of the most common types of debt are usually treated in a Chapter 13 plan. This is a simplified overview because the exact treatment usually depends on the type of claim, the terms of the debt, your income, your property, and the proposed plan requirements.
| Type of Debt | Examples | Typical Chapter 13 Treatment |
|---|---|---|
| Priority unsecured debts | Certain taxes and domestic support obligations | Most priority claims generally must be paid in full through the plan, although the Bankruptcy Code contains exceptions and allows different treatment in some circumstances. |
| Mortgage arrears | Missed payments on a home you want to keep | Chapter 13 can generally allow you to cure qualifying pre-bankruptcy mortgage arrears over a reasonable period while maintaining the regular mortgage payments that come due during the case. |
| Vehicle and other secured debts | Car loans and loans secured by other property | Treatment depends on the collateral, the loan, when the debt was incurred, and other bankruptcy rules. In some cases the secured claim can be paid through the Chapter 13 plan. |
| General unsecured debts | Credit cards, medical bills, and most unsecured personal loans | These creditors may receive anything from a relatively small distribution to payment in full. The amount can depend on disposable income, nonexempt property, the length of the plan, and other confirmation requirements. Qualifying unpaid balances may be discharged after successful completion of the plan. |
| Long-term debts | A home mortgage that will continue beyond the end of the Chapter 13 case | The plan may cure a pre-bankruptcy default while regular payments on the long-term debt continue. The underlying loan generally continues after the Chapter 13 case if it has not been paid off. |
| Debts that may survive bankruptcy | Certain domestic support obligations, some taxes, and other nondischargeable debts | Chapter 13 may provide a way to pay or manage some of these obligations, but filing Chapter 13 does not necessarily mean the remaining balance will be discharged when the case ends. |
How Much Will Your Chapter 13 Plan Payment Be?
A Chapter 13 plan payment is not based on a single formula. It usually depends on your income, reasonable living expenses, the kinds of debts you have, your property values and their applicable exemptions, arrearage amounts, priority debt amounts, attorney fees, trustee fees, and how long the plan will last.
In practice, I look at a Chapter 13 payment as having to answer two different questions: What does bankruptcy law require the plan to pay and what can the household realistically afford to pay each month? A workable or feasible Chapter 13 plan has to account for both.
I built the free Chapter 13 plan payment calculator below to help you see how those two sides of the calculation can come together. Based on the information you enter, the calculator estimates the minimum monthly payment that may be needed to fund the plan and compares it with the payment your household budget may support. It also estimates your plan length, disposable income, amounts needed for certain debts and arrearages, attorney fees, and what the numbers may look like over a 36-month versus 60-month plan.
The calculator is an educational estimate, not a determination of what your actual Chapter 13 payment will be. Local court and trustee practices, claims filed in the case, property values, exemptions, and other case-specific issues can change the result. You do not need to provide your name, email address, or phone number to use the calculator.
Chapter 13 Plan Payment Calculator
Chapter 13 plan payments depend on many factors, including local court and trustee practices. This tool gives an educational estimate only, not legal advice.
Median-income reference date: April 1, 2026.
What Happens After You File Chapter 13 Bankruptcy?
A lot of the formal bankruptcy steps in a Chapter 13 case happen early on. Generally you file the case, begin making plan payments, meet with the Chapter 13 trustee at the 341 meeting, and work toward confirmation of the plan. The much longer part of the case is actually living under that plan and completing it.
Filing Starts the Case
A Chapter 13 case begins when the bankruptcy petition is filed. The filing includes detailed information about your income, expenses, property, debts, and recent financial activity, and a Chapter 13 trustee is assigned to the case. Bankruptcy protection known as the automatic stay, also usually takes effect when the case is filed. The stay can immediately stop many creditor actions, like repossession, foreclosure, and creditor collections efforts.
The important thing to understand is that your case is already moving before the court decides whether to confirm your proposed Chapter 13 plan.
You Start Making Payments Before the Plan Is Confirmed
This surprises a lot of people. You generally do not wait for the bankruptcy judge to approve your Chapter 13 plan before you begin paying. Under 11 U.S.C. § 1326, Chapter 13 payments generally must begin no later than 30 days after the filing of the plan or the bankruptcy case, whichever occurs first, unless the court orders otherwise.
The trustee generally holds those plan payments while confirmation is pending. Starting the payments immediately also provides an early real-world test of whether the proposed payment actually works with your household budget.
The Trustee Reviews the Case and You Attend a 341 Meeting
You will attend a meeting with the Chapter 13 trustee commonly called the 341 meeting or meeting of creditors. You answer questions under oath about the financial information you filed and the proposed plan. Creditors are allowed to participate, although they often do not appear in routine consumer cases.
People sometimes imagine the 341 meeting as a courtroom hearing where someone decides whether they get bankruptcy relief. It is not. The bankruptcy judge does not conduct the meeting. Its primary purpose is to allow the trustee and creditors to examine the debtor about the case and the proposed plan.
The Plan Then Goes Through Confirmation
Confirmation is where the bankruptcy court determines whether the proposed plan satisfies the legal requirements for Chapter 13. The trustee and creditors may object, and plans are often amended when an issue needs to be corrected or resolved.
Under 11 U.S.C. § 1324, the confirmation hearing generally must occur between 20 and 45 days after the meeting of creditors, although the court can allow an earlier hearing in certain circumstances.
Once the court confirms the plan, its terms generally bind both you and your creditors. At that point, most of the early procedural work is over and the longer part of Chapter 13 begins.
Then You Have to Complete the Plan
For the next three to five years, the focus shifts from getting the plan approved to staying on track with it. You make the required plan payments and keep up with other obligations that apply in your case. If your financial circumstances materially change, bankruptcy law may allow the plan to be modified in some situations rather than forcing the case to continue exactly as originally confirmed.
After you complete the required plan payments and satisfy the other requirements for a Chapter 13 discharge, the court can discharge qualifying remaining debts under 11 U.S.C. § 1328. Some debts are not discharged and may remain your responsibility after the case ends.
How Do You Know if Your Chapter 13 Plan Will Be Three or Five Years?
Whether your Chapter 13 plan will be three years or five years depends on how your income compares to the median income for your household size in your state. Bankruptcy law calls this the applicable commitment period. The rules are found in 11 U.S.C. § 1325(b)(4) .
- If your current monthly income is below the applicable median: the commitment period is generally three years, although the court can approve a longer plan if for example you need more time to pay certain claims. A Chapter 13 plan can't extend beyond five years.
- If your current monthly income is above the applicable median: the commitment period is generally five years.
A five-year plan is not necessarily a bad thing. In some cases, the extra time can make Chapter 13 more workable because amounts that must be paid through the plan can be spread over more months. For example, paying $30,000 over 60 months creates a very different monthly burden than paying the same amount over 36 months.
You can use our median income calculator to make a quick comparison between your household income and the current median for your state and household size. The calculator can give you a useful starting point, but it does not determine your Chapter 13 plan length by itself because bankruptcy law uses specific rules for calculating current monthly income.
Who Can File Chapter 13 Bankruptcy?
The eligibility rules for Chapter 13 are pretty straightforward. Generally, you must be an individual (no business entities like corporations) with regular income, your debts must fall within the Chapter 13 debt limits, and you must satisfy the pre-bankruptcy credit counseling requirement. You can find the main eligibility rules in 11 U.S.C. § 109 .
You Need Regular Income
There are some things that people should understand about eligibility. "Regular income" does not necessarily mean a regular paycheck. The Bankruptcy Code defines an individual with regular income under 11 U.S.C. § 101(30) as someone whose income is sufficiently stable and regular to make payments under a Chapter 13 plan.
In practice, I care less about whether the money comes from a traditional paycheck and more about whether there is a dependable source of income that can support making the plan payments. W-2 wages are most common, but self-employment income, pensions, Social Security, rental income, and other sufficiently stable income can also support Chapter 13 eligibility.
Your Debts Must Be Within the Chapter 13 Limits
Chapter 13 has debt limits. For cases filed during the current adjustment period (beginning April 1, 2025), an individual generally must have:
- Noncontingent, liquidated unsecured debts: less than $526,700
- Noncontingent, liquidated secured debts: less than $1,580,125
Unsecured debts usually include credit cards, medical bills, and personal loans. Secured debts usually include mortgages and vehicle loans. The terms "noncontingent" and "liquidated" matter because not every disputed or potential obligation is necessarily counted the same way when determining your Chapter 13 eligibility.
The Chapter 13 debt limits are adjusted periodically, so it might be a good idea to check the current amounts before filing. See 11 U.S.C. § 109(e) .
You Generally Must Complete Credit Counseling Before Filing
You generally have to complete credit counseling from a court-approved credit counseling agency before you can file Chapter 13. This has to be done within 180 days of filing. There are limited exceptions for this requirement. See 11 U.S.C. § 109(h) . You can find approved credit counseling agencies through the U.S. Courts .
Types of Bankruptcy
Learn how chapter 7 and chapter 13 work and how each may address different types of debt.
Chapter 13 May Also Protect a Co-Signer
The co-debtor stay is a Chapter 13 protection that I think a lot of people may overlook. Filing Chapter 13 can prevent a creditor from pursuing another person who is also liable for the debt, such as a family member who co-signed a loan.
This protection can be found in 11 U.S.C. § 1301. It applies only to certain consumer debts and has important limitations that you have to pay attention to. A creditor can ask the bankruptcy court to lift the co-debtor stay in circumstances allowed by the Bankruptcy Code.
The co-debtor stay is important because I think most people don't want their friends or family members to be harmed by their bankruptcy filing. The bankruptcy decision may affect more than just the person filing the case.
What Chapter 13 Bankruptcy Cannot Do
Chapter 13 is pretty flexible, but it is not magic. One of the most important parts of evaluating a Chapter 13 case is figuring out whether the problem is something bankruptcy can actually fix. There are limits to what a repayment plan can accomplish.
- Chapter 13 cannot make an unaffordable house affordable. Chapter 13 may be able to give you time to catch up on your mortgage arrears, but if you can't afford the regular mortgage payment, spreading the missed payments over several years may only postpone the underlying problem.
- Chapter 13 usually cannot rewrite your mortgage agreement for your residence. Bankruptcy law generally doesn't allow a Chapter 13 plan to modify the rights of a lender whose claim is secured only by your residence. While you may be able to cure missed payments over time, Chapter 13 generally does not let you reduce the mortgage balance, interest rate, or regular payment. There are exceptions, so the particular loan and its maturity date matter. See 11 U.S.C. § 1322(b)(2) and (c)(2).
- Filing Chapter 13 does not guarantee that you will keep a house, car, or other property. Chapter 13 bankruptcy can provide you with powerful tools for keeping property, but the numbers still have to work. If you can't make the ongoing payments or fund the plan, Chapter 13 cannot guarantee that your property will be saved.
- The automatic stay does not stop everything. Filing Chapter 13 usually stops many collection actions, but the automatic stay has statutory exceptions and creditors can sometimes ask the bankruptcy court for relief from the automatic stay. Prior bankruptcy filings can also affect how the stay applies. See 11 U.S.C. § 362.
- Chapter 13 doesn't discharge every debt. Even after successful completion of the plan, certain obligations can survive the bankruptcy. These include ongoing domestic support obligations, most student loans, and other debts excluded from the Chapter 13 discharge. See 11 U.S.C. § 1328.
In my experience, the first limitation above is probably the most important. Chapter 13 is very good at solving a temporary problem when someone's finances have recovered and they need time to catch up. It is much less useful when the underlying monthly obligation itself is no longer affordable.
Can Chapter 13 Bankruptcy Help You Keep Your House?
There are five numbers I want to know early when someone tells me they want to save their house in Chapter 13: their income, their monthly mortgage payment, how much they are behind (the arrears), their home's value, and how much they still owe on it. These figures help me answer two important questions: can Chapter 13 give them enough time to catch up, and can the homeowner realistically afford to keep the house?
Chapter 13 Can Give You Time to Catch Up on Mortgage Arrears
Missed payments are commonly called mortgage arrears. Chapter 13 can allow you to cure your mortgage arrearage over the life of the Chapter 13 plan period while the regular mortgage payments are maintained. This treatment is authorized by 11 U.S.C. § 1322(b)(5) and it has helped countless individuals avoid foreclosure.
Here's an example of how this all works. Imagine a homeowner is $25,000 behind on their mortgage after hard times, but now that the hard times are over can afford their monthly mortgage payment. The only problem is that they now have a foreclosure date set unless they can come up with the $25,000 arrearage that accumulated when times were bad. The homeowner has no way to come up with the $25,000 arrearage to avoid foreclosure. The homeowner files Chapter 13 before the foreclosure date and gives proper notice of the filing to their mortgage lender. Since this was a timely filing the foreclosure was stopped by the automatic stay. The homeowner files a 60 month Chapter 13 plan that spreads the $25,000 arrearage over the life of the plan. The homeowner completes the plan successfully and as a result comes out of Chapter 13 with $0 in arrearage and their home is saved from foreclosure.
The video below is me explaining how Chapter 13 can be used to address mortgage arrears and a pending foreclosure.
You Still Have to Deal With the Regular Mortgage Payment
As we saw above you can use Chapter 13 to cure arrears, but filers must also keep up with the monthly mortgage payments that come due after their case is filed. Failing to make ongoing mortgage payments could result in the mortgage lender asking the court for relief from the bankruptcy stay (the bankruptcy protection) so they can begin foreclosure proceedings or other collection actions. Depending on the plan and local practice, those ongoing payments may be made directly to the mortgage servicer or handled through the Chapter 13 trustee through a conduit plan.
Note that a mortgage arrearage problem is different than a mortgage affordability problem. If someone falls behind on their mortgage during a temporary bad financial time but is now able to afford it again, then Chapter 13 may be able to provide the time they need to recover. If the mortgage payment itself is still not affordable, curing the arrears may not solve the underlying budget problem.
Your Home Equity Can Affect the Plan
Your home's equity can also affect how much your plan must pay if it is more than your allowed exemption or homestead exemption. Under 11 U.S.C. § 1325(a)(4), unsecured creditors generally must receive at least as much through the Chapter 13 plan as they would receive if the debtor's estate were liquidated in Chapter 7. For example, if an imaginary Chapter 7 liquidation left $4,000 in nonexempt value after accounting for liens, exemptions, and applicable liquidation costs, the Chapter 13 plan would probably have to provide unsecured creditors at least that amount.
Foreclosure Timing Is Critical
A foreclosure date matters enormously.As we have seen, filing bankruptcy usually triggers the automatic stay, which can stop foreclosure actions as long as there aren't circumstances that can limit it. Generally, if you file your case before the foreclosure sale, and properly give notice of the filing to your mortgage lender, you can stop the sale. If you fail to file before the sale, it is generally too late. Under 11 U.S.C. § 1322(c)(1), a default may be cured until the residence is sold at a foreclosure sale conducted under applicable nonbankruptcy law. Waiting until the last minute is risky. Exactly when a foreclosure sale is considered complete can depend on state law.
For a broader discussion of home equity, exemptions, Chapter 7, and Chapter 13, see our guide on filing bankruptcy and keeping your house.
Can Chapter 13 Bankruptcy Help You Keep Your Car?
If you want to keep your car in Chapter 13 it's really important to know what the vehicle is worth, whether you're behind on the loan, and if so by how much, when the vehicle was purchased, and whether the lender has already repossessed your vehicle. Those facts usually determine what options Chapter 13 can provide.
Chapter 13 May Stop a Pending Repossession
If the lender hasn't repossessed the vehicle, the automatic stay can stop the lender from taking the vehicle. The Chapter 13 plan can then provide for the lender's secured claim and, depending on the facts, the payments that were missed.
If the Car Has Already Been Repossessed, the Problem Is More Complicated
Filing bankruptcy doesn't necessarily guarantee that a lender holding a repossessed vehicle will return it because the automatic stay went into effect. Whether the vehicle can be recovered usually depends on your rights under state law, how much time has passed since the repo, when and if you file a motion for turnover, and the bankruptcy turnover rules in your jurisdiction.
This is an example of why the timing of your filing is very important. If keeping your vehicle is important, filing before the lender takes it can present a very different situation than trying to recover it afterward.
Chapter 13 Can Sometimes Change How Much of a Car Loan Is Treated as Secured
There are special rules for vehicle loans in Chapter 13. In the right case, an undersecured car loan may be divided into a secured claim based on the value of the vehicle and an unsecured claim for the remaining balance. This is commonly called a Chapter 13 vehicle cramdown. Under 11 U.S.C. § 1325, a vehicle purchased within 910 days before filing bankruptcy generally cannot be crammed down based on the vehicle's fair market value. If the vehicle was purchased more than 910 days before filing, a cramdown may be available if the other requirements of the statute are met.
For example, someone who owes $28,000 on a car with a value of $18,000 may have a very different Chapter 13 analysis if the vehicle was purchased three years ago rather than twelve months ago. The purchase date, value, vehicle loan balance, and use of the vehicle are all important facts for a successful cramdown.
For a broader discussion of keeping a financed or paid-off vehicle, see our guide to filing bankruptcy and keeping your car. For a deeper explanation of the special loan-modification rules, see our Chapter 13 vehicle cramdown guide.
Chapter 13 Mistakes I See People Make
There are some mistakes I see people make before and during their Chapter 13 cases and we should identify these so that you can hopefully avoid them.
Paying Back Friends or Family Members Before Filing
You may have borrowed money from someone you know when times were tough and want to repay them. That's completely understandable but it can have a negative effect on your Chapter 13 case.
If you owe money to a friend or family member, bankruptcy law still treats them as a creditor. Your relationship with them doesn't change that classification. Some family members could also fall within the Bankruptcy Code's definition of an "insider." This can become important if payments made before your bankruptcy filing are reviewed by the trustee or possibly a creditor.
Payments made shortly before filing bankruptcy can be treated as preferential transfers. The equitable theory is that one creditor should not receive favorable treatment at the expense of other creditors who are entitled to similar treatment. Under 11 U.S.C. § 547 , certain payments made within 90 days before filing can potentially be avoided, and the lookback period can extend to one year when the creditor was an insider.
Leaving Something Off the Bankruptcy Papers
Bankruptcy requires a broad financial disclosure. You have to list all of your assets, and answer all the questions in the bankruptcy documents fully and truthfully. For example, bank accounts, lawsuits, tax refunds, business interests, property transfers, debts owed to family members, and other financial interests are important to disclose even if they do not seem important to the person filing.
I tell my clients that this is a time when you want to put all of your cards on the table. Even if something doesn't sound important enough to you to disclose, list it. You may even hear friends or family give really bad advice about not having to list something. Do not follow it. Make a true and complete disclosure and you will sleep better at night.
Moving or Transferring Property to Protect It
Transferring property, adding someone to a deed, moving money, or giving property away before filing bankruptcy can create problems that didn't exist before the transfer was made. The better approach is to disclose the property and determine whether an exemption protects it before making a transfer.
Bankruptcy planning and hiding or transferring property are very different things. If an asset may be difficult to protect, I want to analyze the asset, its value, the applicable exemptions, and the available bankruptcy options before anyone changes ownership of it.
Taking on New Debt During the Chapter 13 Case
A Chapter 13 case may last three to five years, so it is possible that you may need another vehicle, need to refinance something, or just need credit while the case is pending.
Procedures vary in each jurisdiction, but Chapter 13 filers may need the trustee's consent or court approval before incurring new debt. It's usually best to consult the Chapter 13 trustee before taking on new debt because the additional obligation can affect your ability to complete the plan.
How Does Chapter 13 Affect Your Credit?
It's probably not a surprise to anyone that bankruptcy will negatively affect your credit. There isn't an exact formula to determine how much it will affect your credit and it usually depends in part on what was already on your credit report before the bankruptcy.
A lot of people who come to see me about Chapter 13 are not starting with perfect credit by any means. They usually already have a couple months of late payments, collections, charged-off credit cards, or other negative credit information on their reports, and their credit usually sees less of a hit than someone with really good credit. A lot of the damage has already been done.
FICO makes the same point in its explanation of how bankruptcy affects FICO Scores .
How Long Does Chapter 13 Stay on Your Credit Report?
A Chapter 13 bankruptcy is generally reported on your credit report for seven years from the filing date. The federal Fair Credit Reporting Act allows bankruptcy data to be reported for 10 years, but consumer reporting guidance from the CFPB and FICO say seven years is the typical reporting period for Chapter 13 bankruptcy.
Keep in mind that this doesn't mean filing bankruptcy has the same effect on your credit score for all seven years. FICO says that negative information has less of an effect as it gets older, assuming the rest of the credit profile is improving.
What I Tell People About Credit Before Filing
I wouldn't make the bankruptcy decision based only on the fear of damaging your credit. While credit is important, it's one part of a larger financial picture. If someone is already missing payments, facing foreclosure, being sued, or unable to keep up with their debts, avoiding bankruptcy doesn't mean their credit will remain intact.
I suggest looking at your financial situation on each path. What happens if you file Chapter 13, and what happens if you don't? If you file are you able to resolve major financial issues and get on track to recovering, or by not filing do these financial issues continue to persist with only the benefit of not having a bankruptcy on your credit?
After Filing, Check What Is Actually Being Reported
A practical step you can take is to review your credit reports after filing and throughout the duration of the case. Look for information that may or may not be accurate. If something is not accurate dispute it. The Consumer Financial Protection Bureau recommends reviewing your reports and disputing information that is incorrect.
You can obtain your credit reports through AnnualCreditReport.com, which is the federally authorized source for free credit reports.
When Chapter 13 Deserves a Closer Legal Review
You can file Chapter 13 on your own without an attorney. But I'll be honest with you, filing Chapter 13 is no cakewalk and I genuinely don't recommend anyone file without an attorney. You'll probably see a hundred Chapter 13 guides on the web suggest that it's not overly challenging to do on your own, and candidly I think that is deceiving. There are several steps to a successful Chapter 13 case and there are also several ways to get sideways in a Chapter 13 case. And these steps can change at any time, if for example you have an objection to your Chapter 13 plan for any reason, have a motion from a creditor for relief from the bankruptcy stay, or get a motion to dismiss from the Chapter 13 trustee for a filing error, just to name a few. I've seen this process be difficult enough for attorneys who have actual bankruptcy experience, so I don't recommend someone without any experience attempt it on their own. The choice of whether or not you get an attorney for Chapter 13 is entirely your decision.
I would be especially careful about filing without an attorney if you have any of the urgent financial issues we've discussed above. If a foreclosure sale is approaching, a vehicle has already been repossessed, you have substantial nonexempt equity, you recently transferred property or repaid a family member, you own a business, you have significant tax or support debt, or you have filed bankruptcy before, these are all situations that can make a Chapter 13 even more challenging.
If you do choose to speak with a bankruptcy attorney about Chapter 13, some of the most useful questions to ask are:
- What problem is Chapter 13 solving for me that Chapter 7 can't?
- What do you estimate my monthly plan payment will be, and what is included in it?
- Which debts have to be paid in full through the plan?
- How will my mortgage and/or vehicle loan be treated?
- Do I have any property that isn't exempt that will affect the plan payment?
- What happens if my income or expenses change during the case?
- Are any debts going to remain after I complete the Chapter 13 plan?
- What happens if I can't complete the plan?
Frequently Asked Questions About Chapter 13 Bankruptcy
How much does it cost to file Chapter 13?
Currently the court filing fee for a Chapter 13 bankruptcy case is $313. In some cases the court may allow the filing fee to be paid in installments if you cannot pay the entire amount when the case is filed.
Attorney fees are separate and vary by location and the complexity of the case. Some bankruptcy courts have local rules or standard fee arrangements for Chapter 13 cases. Usually some or all of the unpaid attorney fees can be paid through the Chapter 13 plan.
What happens if I miss a Chapter 13 plan payment?
Missing a payment can put your case at risk for dismissal and the Chapter 13 trustee can file a motion to dismiss the case.
If your finances change during your plan, a plan modification could be possible in some cases under 11 U.S.C. § 1329. This is an issue I would address quickly rather than allowing missed payments to accumulate.
Can I pay off my Chapter 13 plan early?
Paying your remaining scheduled Chapter 13 plan payments in a lump sum generally will not end your Chapter 13 case early. Depending on the plan and applicable law, early payoff may require you to pay all allowed unsecured claims in full, modifying the plan, or getting other relief approved by the bankruptcy court.
If you find that you suddenly have the ability to pay the plan early, I would have the payoff reviewed before sending a large lump-sum payment to the trustee. In some cases, ending the plan early may require paying unsecured creditors more than the debtor originally expected or modifying the confirmed plan.
Will my employer or neighbors know that I filed Chapter 13?
Bankruptcy filings are public, so if someone actively looks for your case they could probably find out that you filed. The bankruptcy court only sends out notice of your bankruptcy case filing to creditors and interested parties in your case.
It's possible that your employer may learn about your case in some situations. For example, sometimes Chapter 13 plan payments can be made through your payroll department where you work. An employer could also be notified of your filing if a wage garnishment was in place before your case was filed.
Federal bankruptcy law provides employment protections. Under 11 U.S.C. § 525, a private employer may not terminate or discriminate against an employee solely because the employee filed bankruptcy.
Can I file Chapter 13 more than once?
Yes. There isn't a rule that says you can only file Chapter 13 once. However, prior bankruptcy filings can affect your eligibility for another discharge and the protection you receive from the automatic stay.
Under 11 U.S.C. § 1328(f), you generally cannot receive a Chapter 13 discharge if you received a discharge in a Chapter 7, 11, or 12 case filed during the four years before the new Chapter 13 case, or in another Chapter 13 case filed during the preceding two years.
A recently dismissed bankruptcy case can create a separate issue. Under 11 U.S.C. § 362(c)(3) and (4), one or more cases dismissed during the previous year can limit or prevent the automatic stay from taking effect normally in a new case.
What happens if my Chapter 13 case is dismissed?
If a Chapter 13 case is dismissed before you receive a discharge, the bankruptcy generally ends without discharging the debts. The automatic stay also ends, which can allow creditors to resume collection activity such as lawsuits, garnishments, foreclosure, or repossession if they otherwise have the legal right to do so.
What to do after a dismissal depends on why the case was dismissed. Sometimes the issue can be addressed and the case can be reinstated.
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