FAQs for Chapter 13 Bankruptcy

What Is Chapter 13 and How Does It Work? 

Chapter 13 is also called "reorganization bankruptcy." You file the same forms as you file in Chapter 7 plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three to five years.

Some debts must be repaid in full, some are paid at a fractional rate, and others aren't paid at all. Some debts you have to pay with interest, some are paid at the beginning of your plan, and some at the end. A bankruptcy trustee is assigned to oversee the case and handle your payments.

You will attend the First Meeting of Creditors about six to seven weeks after you file. If the trustee is satisfied with your payment plan, he or she will recommend its approval by the judge. A few weeks after the First Meeting of Creditors, the judge normally confirms (approves) your plan if no creditor opposes it and the trustee has recommended it.

When a creditor or the trustee objects to a plan, the judge usually holds a hearing within a few months to determine whether your plan should be approved over the objection. It is also possible for you to resolve the objection before the judge's hearing by amending the plan to satisfy the objection.

If your plan is confirmed, and you make all the payments called for under your plan, you will receive a discharge of any balance owed on all dischargeable debts at the end of your case.

What is the difference between Chapter 7 and Chapter 13?

In Chapter 7, you are subjecting your non-exempt assets to court liquidation and attempting to discharge those debts that Chapter 7 will eliminate. In Chapter 13, you are reorganizing your debts, and paying a portion. The choice depends on the kinds of debts you owe, your income, and the value of your assets.

Chapter 7 is known as "liquidation bankruptcy." In a Chapter 7 case, you file several forms with the bankruptcy court listing income and expenses, assets, debts and property transactions for the past year. A court-appointed individual, the bankruptcy trustee, is assigned to oversee your case.

About a month after filing, you must attend a First Meeting of Creditors where the trustee reviews your forms and asks questions. Despite the name, creditors rarely attend. If you have any non-exempt property, the trustee will ask that you turn it over to him or her. The meeting normally lasts only a few minutes.

If there are no challenges from creditors, approximately two months later, you receive a discharge order, which is a notice from the court that "all debts that qualified for discharge were discharged." Then, your case is over. 

Chapter 13 is also called "reorganization bankruptcy." You file most of the same forms as you file in chapter 7, plus a proposed repayment plan, in which you describe how you intend to repay your debts over the next three to five years.

Some debts must be repaid in full; others, you pay only a percentage; others aren't paid at all. Some debts you have to pay with interest; some are paid at the beginning of your plan and some at the end. A bankruptcy trustee is assigned to oversee the case and handle your payments.

You will attend the First Meeting of Creditors about six to seven weeks after you file. If the trustee is satisfied with your payment plan, he or she will recommend its approval by the judge. A few weeks after the First Meeting of Creditors, the judge normally confirms (approves) your plan if no creditor opposes it and the trustee has recommended it. 

When a creditor or the trustee objects to a plan, the judge usually holds a hearing within a few months to determine whether your plan should be approved over the objection. It is also possible for you to resolve the objection before the judge's hearing by amending the plan to satisfy the objection.

If your plan is confirmed, and you make all the payments called for under your plan, you will receive a discharge of any balance owed on all dischargeable debts at the end of your case. 

You should consult with an attorney to decide which type of bankruptcy makes sense for you.

Who can file a Chapter 13 bankruptcy petition?

Chapter 13 is for individuals only. Corporations and partnerships may not file a Chapter 13 petition. As in Chapter 7, you must have a place of residence, a place of business, or property in the U.S.in order to file.

In addition, you must have some source of income and, on the date the case is filed, owe less than $394,725 in unsecured debt and less than $1,184,200 in secured debt. This amount is adjusted for inflation every three years. The next adjustment is scheduled for April 2019.

Can you file under Chapter 13 if you are unemployed?

Yes. If you have income from other sources, such as unemployment, disability benefits, or family support, you may file under Chapter 13. Such income may allow you to provide for a repayment plan.

Can you file under Chapter 13 if you are self-employed?

Yes. A self-employed person meeting the eligibility requirements above may file under chapter 13.

You can also continue to operate your business during the chapter 13 case.

How long does a Chapter 13 plan last?

A Chapter 13 plan must be proposed to last from three to five years, depending on your income level, unless all debts can be paid off in full in less time. 

When do you begin making payments to the Chapter 13 trustee and how do you make them?

You must begin making payments to the Chapter 13 trustee within 30 days after your repayment plan is filed with the court. The payments must be made regularly, usually on a weekly, biweekly, or monthly basis. The payments can be made either directly by you or by your employer through a payroll deduction.

How much of your income must be paid to the Chapter 13 trustee under a Chapter 13 plan?

Usually, all of your and your spouse's available income for a three to five-year period must be paid to the Chapter 13 trustee.

The amount of the payment will depend on the amount you need to pay certain types of debt which are secured by collateral (cars, mortgage arrears) or which are given priority status (child support, certain tax debts), plus any amount needed to pay to other creditors based on your income and expenses.

Do all your creditors have to approve your Chapter 13 plan?

No. Your Chapter 13 plan is approved by the court, not your creditors. However, creditors are permitted to file objections to your plan and these objections must be ruled on by the court before it approves your Chapter 13 plan.

What happens if you are unable to complete the chapter 13 payment plan?

If you are unable to complete the chapter 13 payment plan, you have four options:

  • Seek a modification of your chapter 13 plan due to your changed circumstances,
  • Dismiss the chapter 13 case,
  • Convert the chapter 13 case to chapter 7, or
  • If you are unable to complete the payments due to circumstances for which you should not be held accountable, you can ask the court for a "hardship discharge," which may partially discharge your debts.

How does Chapter 13 differ from a private debt consolidation service?

In a Chapter 13 case, the bankruptcy court provides for a type of debt consolidation, just as private debt consolidation services do.

However, only the court has the authority to prohibit creditors from attaching or foreclosing on the debtor's property, to force unsecured creditors to accept a Chapter 13 plan that pays only a portion of their claims, and to discharge a debtor from unpaid portions of debts. Private debt consolidation services have none of these powers.

If you take the debt consolidation option, you run the risk of liens, lawsuits, and garnishments while you are attempting to pay off your debts.

Why choose Chapter 13 over Chapter 7 bankruptcy?

Although most people who file for bankruptcy choose Chapter 7, there are a number of reasons why you might select Chapter 13.

  • You cannot file for Chapter 7 bankruptcy if you received a Chapter 7 discharge within eight years or a Chapter 13 discharge within the previous six years (unless you paid off at least 70% of your unsecured debts in the Chapter 13 bankruptcy). On the other hand, you can file for Chapter 13 bankruptcy and be eligible to receive a discharge if you have not filed for chapter 13 in the prior two years and received a discharge in the prior case.

  • You have valuable, non-exempt property you do not want to lose.

  • You are behind on your mortgage or car loan. In Chapter 7, you have little protection from foreclosure or repossession of your property if you are behind on payments. In Chapter 13, you can stop foreclosure and repay house arrears through your plan, and keep your home by making the future payments required under your mortgage loan contract. For a vehicle, the entire loan can be restructured and paid through your Chapter 13 plan.

  • You have debts that cannot be discharged in Chapter 7. These debts may include tax debts, and the Chapter 13 will protect you from collections by tax agencies such as the IRS.

  • You have co-signers on personal loans. In Chapter 7, the creditors will go after your co-debtors for payment. In Chapter 13, the creditors may not seek payment from your co-debtors for the duration of your case if your Chapter 13 plan provides for full payment of cosigned debts.

  • Your income is sufficient to pay some of your debts and Chapter 7 might be considered an abuse of the bankruptcy laws.

  • You feel a moral obligation to repay that portion of your debts that you are able to.

Can a Chapter 7 case be converted to Chapter 13?

A pending Chapter 7 case may be converted to Chapter 13 at any time prior to discharge, if the court approves a motion to convert.

Can I keep my home if I have a mortgage?

One of the biggest concerns you may have in considering bankruptcy is the possibility of losing your home.

If you are behind on your mortgage payments, you will almost certainly lose your house if you file a Chapter 7 bankruptcy. Your mortgage lender will ask the bankruptcy court to lift the automatic stay to begin or resume foreclosure proceedings.

In a Chapter 13 bankruptcy, you will not lose your house if you immediately resume making the regular payments called for under your mortgage contract agreement and you repay your missed mortgage payments through your Chapter 13 plan.

If you are current on your mortgage payments, you will not lose your house if you file for Chapter 13 bankruptcy, as long as you continue to make your mortgage payments. In Chapter 7 bankruptcy, whether or not you will lose your house depends on the amount of equity you have in the property. This is known as the "homestead exemption."

In California, the homestead exemption on the real or personal property you occupy, including a mobile home, boat, stock cooperative, community apartment, planned development, or condo, is as follows:

  • $75,000 if single and not disabled
  • $100,000 for families, if no other member has a homestead
  • $175,000 if over 65, blind or disabled, or
  • $175,000 if 55 or older, single and earn under $25,000, or married and earn under $35,000, and creditors seek to force the sale of your home
  • Sale proceeds are exempt for six months after they are received, unless reinvested in another homestead

If your home equity is too large for you to keep your home in a Chapter 7 case, you may want to consider Chapter 13 instead so that you can develop a plan for repayment without selling the home.

Can I keep my home if I rent?

If you are current on your rent payments and file for bankruptcy, your landlord will not be notified. If you are behind on your rent when you file and your landlord has begun eviction proceedings, your landlord can come to the court to have your automatic stay lifted and complete the eviction.

Will I lose my car if I file for bankruptcy?

In Chapter 7, you can keep your vehicle if the equity in it fits within your bankruptcy exemptions. If the equity is greater than your exemptions, the Chapter 7 trustee can sell the vehicle to pay creditors. If there is a loan on the vehicle, you must maintain your contract payments to the lender or they may request court permission to repossess the vehicle.

In Chapter 13, you keep your vehicle, even if the equity in it exceeds your exemptions. If there is a loan on the vehicle, it can be restructured and repaid as part of the Chapter 13 payment plan. If you are behind on your vehicle loan payments, Chapter 13 will prevent the vehicle's repossession.

Leased vehicles normally have no equity and therefore you have no equity interest to exempt. However, payments must be made on time or the lessor will seek court permission to repossess the vehicle.

What is the role of the attorney in a Chapter 13 case?

Your attorney provides a full range of services throughout the bankruptcy process. These services include:

  • Analyzing the amount and nature of the debts you owe and determining the best remedy for your financial problems
  • Assisting you in preparing a budget
  • Examining the liens or security interests of secured creditors to determine whether they are valid or avoidable and how they should be valued, and taking the legal steps necessary to protect your interest
  • Assisting you in drawing up your Chapter 13 plan so that it meets your personal needs and is acceptable to the court
  • Preparing the necessary pleadings and Chapter 13 forms
  • Filing the Chapter 13 forms and pleadings with the court
  • Attending the meeting of creditors, the confirmation hearing, and any other court hearings required in the case.
  • Assisting you in receiving court approval of a Chapter 13 plan
  • Checking the claims filed in the case, filing objections to improper claims, and attending court hearings on such objections
  • Modifying your plan, if necessary, to deal with changed circumstances
  • Assisting you in overcoming any legal obstacles that may arise in the case
  • Assisting you in obtaining a discharge upon the completion of the plan

How do I know the attorney's fee is fair?

The fee charged by an attorney for representing you in a Chapter 13 case must be reviewed and approved by the bankruptcy court. The court will only approve a fee if it finds it to be reasonable.

Often, Chapter 13 fees can be paid as part of your Chapter 13 plan. In many places, the courts have set fee guidelines, which the attorneys comply with in Chapter 13 cases.