When you’re unable to pay your debts due to your tough financial condition, you may try to file for bankruptcy. Usually, debtors who have a significant income will choose Chapter 13 bankruptcy since they’ll not pass a means test for Chapter 7, a type of bankruptcy for those with incomes below State Median Income (SMI).
Chapter 13 bankruptcy allows debtors to restructure their debts into a new repayment plan, either paying some or all of their debts, but they can still maintain their assets that may be used as collateral for loans such as houses, cars, or others.
If you want to save your assets from foreclosure due to your unpaid debts, it’s best for you to file a Chapter 13 bankruptcy. But be sure to understand how it works and what the requirements are to know whether or not you qualify for it.
Okay, let’s learn more about Chapter 13 bankruptcy through our post below!
About Chapter 13 Bankruptcy
A Chapter 13 bankruptcy, also known as a wage earner plan, is a type of bankruptcy for individuals who have a fixed income to re-arrange payment plans for some or all of their debts under court supervision.
Chapter 13 can also be called debt restructuring because you pay your outstanding debts in a new repayment plan. That means you can pay off your debt to creditors over three to five years.
You need to know that the payment plan will last for three years if your current monthly income is less than your SMI, unless the court agrees to a longer period for some reason. Otherwise, this payment plan will last for five years if your current monthly income is greater than your SMI.
In most cases, the payment plan should not be made for a period longer than five years. During that time, the court prohibits the creditor from continuing to make collection efforts against the debtor.
How Chapter 13 Bankruptcy Works
The Chapter 13 bankruptcy allows debtors to submit a repayment plan to their creditors over a new period of time, usually three to five years. The repayment plans are specifically determined by the bankruptcy court, which is largely based on a means test that you have to complete.
Basically, the means test compares your income and your living expenses, as well as the average household expenses in your area. In addition, the ability test can also determine the income that can be used to pay debts each month, which will then be collected by the court to repay your creditors.
If your income is less than or equal to the SMI or your local household expenses, you’ll be considered to have trouble paying off your debts with your current payment plan. With Chapter 13, you can make your repayments over a period of three years, five years, or a specific period of time.
Before you file a Chapter 13 bankruptcy, you have to compile a list of all your creditors along with the amount of money you owe to each creditor, information about your income and its sources, details about your monthly expenses, and a list of any property you own.
Types of Debt in Chapter 13
There are three categories regarding debts or claims under Chapter 13, including:
- Priority debts: These debts include tax obligations, child support, and alimony.
- Secured debt: This type of debt is backed by some form of collateral, such as your home serving as collateral in the case of a mortgage and your vehicle as collateral in the case of a car loan. If you fail to pay on this secured debt, the creditor has the right to seize the collateral.
- Unsecured debt: This debt is not backed by collateral, such as a credit card.
For priority and secured debt, these must be paid in full unless the creditor agrees otherwise. Unsecured debt, on the other hand, does not have to be paid in full.
Cost to File a Chapter 13 Bankruptcy
When filing for Chapter 13 bankruptcy, you’ll be charged a case filing fee of $235 and a miscellaneous administrative fee of $75 that should be paid to the court clerk at the time of registration.
Depending on the bankruptcy court, you can usually pay these fees in installments, or you may be charged miscellaneous fees. If you choose to pay the fee in installments, the court limits the number of installments up to four, and you must pay the final installment no later than 120 days after filing the petition.
In some cases, the court may extend the installment period up to 180 days after the petition is filed. Be sure to be aware that if you fail to pay these fees, this may result in the case being dismissed.
The Eligibility of Chapter 13
Basically, any individual, married couple, and even self-employed persons or unincorporated businesses are eligible to file for Chapter 13 bankruptcy, as long as their total secured and unsecured debts are less than $2,750,000 as of the date the bankruptcy relief is filed.
But there are a few other things you need to know regarding eligibility for Chapter 13 bankruptcy, and these are:
Your income
Having an income is one of the requirements when you file for Chapter 13 bankruptcy. If you cannot prove that you are able to pay your monthly household debts with your income, the bankruptcy court will not approve your petition.
Debt Limits
Chapter 13 bankruptcy sets debt limits for both secured and unsecured debt. Of course, if you have debts exceeding these debt limits, then you will not be eligible to file for Chapter 13 bankruptcy.
The Bankruptcy Threshold Adjustment and Technical Corrections Act (“BTATC”) has increased total debt to $2.75 million over two years. Between April 1, 2022, and March 31, 2025, the debt limit for secured debt is set at $1,395,875, and for unsecured debt, it is set at $465,275.
Applicant Status
Chapter 13 debt relief is only for individuals and qualifying sole proprietors, not for small businesses and corporations. But business owners can file individually rather than on behalf of a corporation. And they must include personally guaranteed business debt in the plan.
It’s important to note that the court will deny your Chapter 13 bankruptcy filing if you refused the bankruptcy petition during the previous 180 days, such as if you intentionally failed to appear in court, you did not comply with court orders, or you voluntarily refused after creditors asked the court for relief to recover property against their liens.
In addition, you must receive credit counseling from approved credit counseling agencies by the U.S. Department of Justice U.S. Trustee Program. If there are not enough approved agencies to provide the necessary credit counseling, the situation will be excluded as an emergency. If you undergo credit counseling and develop a debt management plan, that plan must be filed with the court.
How to File a Chapter 13 Bankruptcy
You can start by filing a petition with the bankruptcy court in the area where you live. For married couples, they can file a joint petition or individual petitions.
When submitting the application, you must complete important documents that contain information about:
- Assets and liabilities
- Current income and expenses
- The amount of your debt and a list of creditors
- Enforceable contracts and unexpired leases
- Financial statements
- Details about tax
Be sure to undergo credit counseling first, which is proven by a credit counseling certificate and a copy of the debt repayment plan created through credit counseling.
After that, you must also provide the trustee with a copy of your tax return or transcript for the most recent tax year, along with copies of any tax returns filed during the case, including tax returns for prior years.
After all important documents are submitted, you’ll receive a letter from the court informing you, your creditor, and the court-appointed trustee that the collection activity on your account has been suspended. That means the creditor must stop conducting collection activity on your account because it has been suspended.
Once your payment plan is filed, the court will review your request through a hearing, and it will determine whether the plan meets legal standards. You can file a repayment plan over a period of three to five years with the help of a court-appointed bankruptcy trustee. The payment plan should be mutually beneficial to both you and the creditor, so that they will agree to your request for a repayment plan.
If you qualify for Chapter 13 bankruptcy and the creditors agree to your proposed repayment plan, the court will grant it. After that, you pay an agreed amount of money each month through the court to the trustee. The trustee will then distribute the money to creditors.
What you should do is stick to your payment plan. In case you are late or do not pay the agreed amount of money each month, the trustee may file a motion to dismiss your Chapter 13 case.
If your financial condition improves, you can also accelerate payments and apply for early release from the agreement. On the contrary, if you fail to make your payments on time, your Chapter 13 will be dismissed.
Benefits of Chapter 13 Bankruptcy
There’s no doubt that individuals who choose to file Chapter 13 bankruptcy realize that they have enough income to pay their debts but are constrained by difficult financial circumstances, such as greater needs or too much debt, so that no matter how much you earn, it cannot cover those debts.
Well, the debt restructuring in Chapter 13 bankruptcy can really help you avoid asset seizures for both secured debts like mortgages and auto loans and unsecured debts like credit cards. Additionally, it can also save you from having to pay any current arrears in support or tax debts or other collection tactics.
A few benefits of Chapter 13 bankruptcy that are not available in Chapter 7 include paying less on your car loan with a cramdown system or eliminating junior mortgages with a lien stripping system.
Also, Chapter 13 acts like a consolidation loan where you pay your debts under a new payment plan to the trustee, and then those payments are distributed to your creditors. Of course, you won’t have direct contact with your creditors while under Chapter 13 protection. This can also protect third parties as co-signers with you on consumer debts.
Regardless of the benefits you can get from Chapter 13 bankruptcy, you must still make all mortgage payments due on time.
Differences Between Chapter 13 vs. Chapter 7, vs. Chapter 11 Bankruptcy
To make it easier for you to determine which bankruptcy chapter is right for you, let’s take a look at the differences between Chapter 7, Chapter 11, and Chapter 11 bankruptcy.
| Chapter 13 | Chapter 7 | Chapter 11 |
| Chapter 13 bankruptcy can be filed by an individual, married couple, or self-employed persons. | Chapter 11 can be filed by an individual, a corporation, a partnership, or other business entity. | Chapter 11 bankruptcy can be filed by businesses or companies since it is expensive and complicated. |
| Debtors must still pay most or all of their debts under a restructured payment plan. | Debtors may be relieved of the obligation to pay most or all of their debts. | Debtors can restructure their debts and can repay them over time. |
| Debtors can protect their assets from being seized. | Debtors are often asked to surrender their assets. | Requirements are more difficult than Chapter 7 and Chapter 13 bankruptcy. |
| The income threshold is higher. | The income threshold is much lower. |
