Known also as reorganization or wage earner’s bankruptcy, Chapter 13 bankruptcy enables you to develop a repayment plan to satisfy all or part of your debts. The advantage of this type of bankruptcy—versus a Chapter 7 one—is that you don’t have to sell your property to repay creditors. The process for Chapter 13 bankruptcy takes three to five years, depending on the repayment plan, and costs $310 in filing and administrative fees.
Requirements for Chapter 13
Many people file for Chapter 13 bankruptcy because they were not eligible to file for Chapter 7 bankruptcy, which liquidates your assets to pay off creditors and discharges your debts immediately. Chapter 13 bankruptcy is designed for consumers who have enough income to pay back all or part of their debts within five years. Those who don’t meet that criterion should be eligible for Chapter 7 bankruptcy. Your unsecured debts must be less than $394,725 in a Chapter 13 bankruptcy and your secured debts, less than $1,184,200. (These amounts are adjusted periodically for inflation.) You also must be current on your federal and state income taxes for the past four years.
What Do You Need to File Chapter 13?
Before you can file for a Chapter 13 bankruptcy, you must complete a credit-counseling course by phone, in person or online within 180 days before filing for bankruptcy. In the session, the counselor considers other feasible ways to manage your debt burden without bankruptcy and without increasing your total debt load. You don’t have to accept any alternate plan a counselor proposes, but you must file that plan and certificate of completion with your bankruptcy filing. Some non-profit credit counselors may charge a reasonable fee for the session, typically between $25 and $50. If you can’t pay the fee, the agency must charge a reduced rate or waive the fee altogether.
To start your bankruptcy petition, you must fill out at least a dozen forms that list your property, debts, income, expenses and information on transactions from the previous two years. You also need to put together a mailing list of your creditors and their contact information, as well as document any debts you dispute. You also need a copy of your credit counseling certificate and pay stubs from the past 60 days. Your trustee may also request a copy of your most recent tax return and other documents. You can file the forms at once. Or, you can file a two-page form to start the process and file the remaining forms within 14 days. Here are the most common forms you need:
- B 101: Voluntary Petition for Individuals Filing for Bankruptcy
- B 106Sum: Summary of Your Assets and Liabilities and Certain Statistical Information
- B 106Dec: Declaration About an Individual Debtor’s Schedules
- B 106 Schedule A/B: Property
- B 106 Schedule C: The Property You Claim as Exempt
- B 106 Schedule D: Creditors Who Have Claims Secured by Property
- B 106 Schedule E/F: Creditors Who Have Unsecured Claims
- B 106 Schedule G: Executory Contracts and Unexpired Leases
- B 106 Schedule I: Your Income
- B 106 Schedule J: Your Expenses
- B 107: Statement of Financial Affairs for individuals Filing Bankruptcy
- B 121: Statement About Your Social Security Numbers
You may need to fill out these next forms depending on your particular case:
- B 101A: Initial Statement About an Eviction Judgment Against You
- B 101B: Statement About Payment of an Eviction Judgment Against You
- B 106 Schedule H: Schedule H: Your Co-debtors
- B 106 Schedule J-2: Schedule J-2: Expenses for Separate Household of Debtor 2
- B 119: Bankruptcy Petition Preparer’s Notice, Declaration, and Signature
Chapter 13 Fees
The bankruptcy court charges a $235 filing fee and a $75 administrative fee, both of which must be paid to the clerk of court when you file. If you get the court’s permission, you can pay both fees in four installments and the first installment must be paid no later than 120 days after the filing. If you fail to pay the fees, your case may be dismissed. To request installments, file the following form:
- B 103A: Application for Individuals to Pay the Filing Fee in Installments
What Happens After Your Chapter 13 Filing?
After you file for Chapter 13 bankruptcy, a trustee is appointed to administer your case. The creditors that you listed in your filing will be notified by the bankruptcy clerk that you have filed for bankruptcy and most collection actions must stop, including foreclosure proceedings. Within 14 days from filing for Chapter 13, you must file a repayment plan that is submitted for court approval. The plan must include fixed payments on a regular schedule—typically biweekly or monthly—paid to the trustee who then distributes the funds to creditors according to the plan’s terms. Creating a feasible repayment plan is complicated, so it’s best to hire a bankruptcy lawyer to help you through the process.
Filing a Repayment Plan
The repayment plan details how your disposable income will be distributed among your creditors, which have differing priorities. Disposable income is the income you have left over after paying for necessary maintenance and support for yourself and your dependents and any charitable contributions up to 15% of your gross income. Child support payments are not included in your income total. These are the types of debts that your repayment plan includes:
- Priority claims: These claims must be paid in full unless creditor agrees to different terms. Examples of priority claims include back taxes and bankruptcy costs.
- Secured claims: If you want to keep the property that backs these debts, you must pay at least the value of the collateral to your creditor. Any missed payments must be made up during the plan schedule. Repayment of larger secured debts, such as a mortgage, can take longer than the bankruptcy plan timeframe.
- Unsecured claims: These debts may not be paid back in full, but your creditors should receive as much as they would in a Chapter 7 filing, at the least.
Meeting Your Creditors
Within 60 days from filing for Chapter 13, the trustee will hold a meeting of creditors that you must attend. At the meeting, you must answer any questions about your financial affairs and the proposed repayment plan. Most issues regarding the repayment plan are addressed and resolved at this meeting or shortly thereafter. To avoid problems, make sure the bankruptcy filing and repayment plan are accurate and complete and have been signed off by the trustee before the meeting.
Rebuilding Your Credit
A Chapter 13 bankruptcy stays on your credit report for seven years from the filing date and will hurt your credit score for a long time after you file. Accounts in good standing included in the bankruptcy stay on your credit history for seven years from the filing date. Delinquent accounts remain on your report for seven years from the original date of delinquency. Your credit report will show your bankruptcy as discharged after you complete your repayment plan. After the bankruptcy is discharged, pull your credit reports from Equifax, Experian and TransUnion to confirm that your creditors are reporting the discharge. Wait until your bankruptcy is discharged before applying for new credit.
Chapter 13 Versus Chapter 7
Unlike a Chapter 13 bankruptcy, which is designed for those with enough income to pay off all or some debts, a Chapter 7 bankruptcy is tailored for lower-income consumers who have few to no assets. Chapter 7 filers can’t feasibly pay off their debts over the three to five years. To file for Chapter 7, you must qualify by passing a means test that shows your income is less than the state median or that you don’t have enough disposable income to pay your debts. Unprotected assets are sold off to pay creditors in a Chapter 7 and the bankruptcy is typically discharged three to five months after the filing date.
Even if you qualify for Chapter 7, there are other reasons to consider a Chapter 13 bankruptcy instead. If you can’t discharge your debts under a Chapter 7 bankruptcy—such as alimony and student loans—then Chapter 13 may be your only solution. Or, if you want to keep your house or car, but their values exceed the Chapter 7 exemption, then Chapter 13 allows you to avoid foreclosure or repossession. Chapter 13 also gets you to get back on track if you’re behind on your mortgage or car payments. You also don’t have to give up nonexempt property—such as an expensive car, rare art or valuable jewelry—in a Chapter 13 bankruptcy that you would be required to sell in a Chapter 7.