Chapter 13 bankruptcy — what you need to know

Save your assets from liquidation, and settle your debts to get a clean slate.

Chapter 13 Bankruptcy

While Chapter 7 bankruptcy is all about liquidating assets to pay back your debts before the remaining balances are discharged, Chapter 13 is about creating a court-ordered plan to pay back your debts. With Chapter 13 you have at least some income and you’re not exactly out on the street, but there’s no reasonable way that you’re going to pay back everything you owe.

The challenges of filing for Chapter 13

While you might think it would be easier to get creditors to agree to an adjusted payment schedule than it would be to get them to discharge your debts, the opposite is usually the case.

Fact: Two thirds of all Chapter 13 filings are dismissed or converted to Chapter 7.

Many times, it’s better from the lender’s perspective to have your filing converted to a Chapter 7, so assets like your home can be liquidated to pay off your debts immediately. This is often better for the lender because they get any money quickly and get out, instead of waiting around for the low payments the court will assign with a Chapter 13.

Why Chapter 13 is usually better for you

So a Chapter 7 bankruptcy is better for the lender, but what about for you? Not surprisingly, it’s Chapter 13.

It’s usually the better option, if…

  • You have significant personal assets and don’t want to lose them in liquidation. A prime example is if you have a large amount of equity built up in your home. On the other hand, if you’re upside down on your mortgage because of the real estate collapse, you may not actually care if that asset gets liquidated.
  • You have steady income, but unsecured debt payments are destroying your monthly finances. If all of your money problems are being caused by too much debt and delinquent credit card accounts, adjusting your payment schedule can put you in a better place without risking your assets.

Pop Quiz

What does it mean to have negative equity in your home?

a) You owe more money than what the home is actually worth.

b) It’s the equity on any home that is losing fair market value.

c) It’s equity that you don’t feel good about.

d) You’re behind at least 6 months on your mortgage payments.

Reveal Answer

This is also known as being “upside down” or “underwater” on your mortgage.

a) You owe more money than what the home is actually worth.

Return to question

Requirements for Chapter 13 filing

Chapter 13 bankruptcy filings have some fairly strict requirements that you will need to meet in order to get the judgment you want.

  • Your total unsecured debt must be less than $360,475
  • Your total secured debts must not total more than $1,081,400
  • You must have been a resident of the state where you wish to file for at least 2 years
  • You must complete a pre-filing credit counseling session with a court-approved certified credit counselor within 180 days before your filing date

There are a few other requirements specific to certain situations and you may also have specific requirements for your state, so it’s recommended you hire a bankruptcy attorney to make sure everything is going according to plan.

What to expect when you file Chapter 13

Once you complete your pre-filing credit counseling session and file formally, an “automatic stay” is issued by the courts.

This prevents creditors from taking any action against you to collect on your debts — in most cases, they’re even prevented from calling you anymore, so no more collector calls. All lawsuits and wage garnishments are stopped, too.

The bankruptcy clerk sends notices of filing out to all creditors and lenders listed in your filing (you must provide any contact information you have). A means test is conducted in accordance with the guidelines set out the BAPCPA. This determines you are eligible to make a Chapter 13 filing.

How long is a Chapter 13 repayment schedule?

Once you’re cleared to file, the judge arranges a court-ordered payment schedule to pay back your debts. You may not have to pay back all of your debts and/or may only be required to pay back a portion of each debt.

Fact: Chapter 13 bankruptcy is also called the “wage earner plan” because of the arranged payment schedule.

You’ll usually have about 3-5 years of payments to make. You pay the money to the trustee and they distribute payments to your creditors. Your creditors aren’t allowed to contact you for additional money. In fact, you’re pretty much assured you won’t talk to a creditor or collector for the entire time it takes to complete your payment schedule.

After you’ve made all of the assigned payments, any remaining balances are discharged and the accounts are closed.

More advantages with Chapter 13

Besides getting the relief of not having to dodge phone calls and hide from your creditors, you can get some distinct benefits with a Chapter 13 filing. They don’t make filing good, but they at least help you make the best of a bad situation.

  • You can save your home from foreclosure. The automatic stay applies to foreclosure proceedings too, so the foreclosure process is stopped when the automatic stay goes into effect (and stays in place until you complete your payment schedule). This gives you more time to save your home and once your judgment is in place, you have more money available to work something out with the lender.
  • It freezes interest/penalties on taxes. If you’ve fallen behind with your taxes, the IRS has some pretty harsh penalties they apply to what you owe. Filing stops any further penalties from being added.

Why you need help filing

If you need to save your home or have other assets that you want to make sure you protect, then you need to have some help when you file for Chapter 13 bankruptcy. Even if you decide to go through the process alone, you’ll still be required to take the credit counseling course before you can file. Our bankruptcy help serves can connect you to both.