Understanding Chapter 13 Bankruptcy: A Complete Guide

Often people find themselves deep in serious financial trouble, but have enough reliable income to fight their way through it if they are provided some time, structure, protection and forgiveness. These are the situations that Chapter 13 bankruptcy was developed for.

Chapter 13 bankruptcy is a legal process under Title 11 of the United States Code that allows people to stop ongoing collection actions, including foreclosures, repossessions, wage garnishments, lawsuits and creditor harassment, and puts them onto a structured plan to repay as much of their debt as they can afford to over a three to five year period, at the end of which their remaining debts are discharged. Often referred to as a “wage earner’s plan”, Chapter 13 bankruptcy is designed for people who have regular income and the ability to pay back some or all of their debt if provided with a extra time and structure to do so. Chapter 13 is the second most common type of bankruptcy case filed in the U.S., making up approximately thirty-eight percent (38%) of all bankruptcy cases filed annually.

The concept is relatively simple. A person who is struggling to maintain all of their monthly payments but who has regular income files a set of papers known as a bankruptcy petition with the federal court. They also file a plan of reorganization, which states how much they can afford to pay every month for the next three to five years and how those funds are to be distributed to their creditors. Upon filing, a bankruptcy trustee is appointed to the case. The trustee collects the payments from the person filing and distributes the funds to the creditors in accordance with the plan. At the end of the plan, any debt that has not been paid in full is discharged (eliminated), giving the person a “fresh start”. Preparing, filing and prosecuting a Chapter 13 case is more complicated than a Chapter 7 bankruptcy, so hiring an experienced bankruptcy attorney to represent the person is strongly recommended.

To understand the Chapter 13 process, you first need to become familiar with the vocabulary:

Debtor: The debtor is the individual that owes money and is filing for bankruptcy protection.
Creditor: The creditors are the parties to whom money is owed by the debtor. Creditors in bankruptcy come in four main categories:
1. Secured creditors: These are creditors who hold debt that is secured by an asset, such as a mortgage against a home or a car loan against a car.
1. Priority creditors: These are creditors to whom the law has provided special treatment, such as recent tax debt, child support obligations and alimony.
1. Unsecured creditors: These are creditors who hold debt that has no collateral against it, such as credit cards, medical bills and payday loans.
1. Leases/Executory Contracts: These are creditors who have a contract with the debtor for payment that may have or may create a future debt, like renting a residence or leasing a car.
Bankruptcy Petition: This is the set of forms and schedules that must be completed and filed under oath with the federal court to start a bankruptcy case.
Plan of Reorganization: This is the form that must be completed and filed that advises all of the parties involved how the debtor proposes to pay the creditors and for how long. Most courts have adopted a custom local Chapter 13 plan form unique to them.
Exemptions: These are the laws that protect a debtor’s property. Depending on the state, they can either be state or federal exemptions. Exemptions are important in Chapter 13 cases because they will limit the amount of debt that the debtor is required to pay back as part of their plan.
Automatic Stay of Bankruptcy: This is a powerful federal injunction that is triggered by the filing of the bankruptcy case. It is this order that stops most collection activities of creditors, including wage garnishment, collection lawsuits, foreclosure and repossession on top of collection calls and letters.
Chapter 13 Trustee: This is the professional appointed by the court to oversee the case. They ensure that the petition and plan are correct, accurate and within the bounds of the law. They are also responsible for receiving the payments from the debtor and distributing the funds to the creditors. At the end of the case, it is the trustee that requests that the case be closed and discharged.
341 Meeting: This is the meeting that the debtor must attend with the trustee. It is usually about four (4) weeks after the filing of the case, is often conducted virtually and usually only lasts for 10-15 minutes.
Confirmation: This is the process during which the plan is given final approval by the bankruptcy judge. Once the plan is confirmed, all parties are bound by it.
Discharge: This is the order entered at the end of the case that permanently eliminates the debts.

A Chapter 13 plan will usually last between three to five years, so you may be asking why anyone would file for Chapter 13 bankruptcy instead of Chapter 7, which only last for four to five months. There are several core reasons that people elect to file for Chapter 13 protection:

They are behind on payments to secured creditors and want to keep the asset. Chapter 13 cases are often filed because the debtor has fallen behind on their mortgage payments or car loan. They want to keep the house/car and have the income to do so, but need the Chapter 13 to provide protection and structure. Chapter 13 allows them to catch up on the mortgage, restructure car loans and address their other debts, all as part of one monthly plan payment. As stated, Chapter 13 will stop a foreclosure or car repossession immediately upon filing.
They have too much income to file for Chapter 7 bankruptcy. The Bankruptcy Code includes a complicated calculation called the “Means Test” that determines whether a person is eligible to file for Chapter 7 bankruptcy. If someone “fails” the means test, then their only option for court protection will be a Chapter 13 bankruptcy.
They have an asset that they want to keep that would not be protected and would likely be liquidated in a Chapter 7 bankruptcy. Most commonly this is equity in their home that exceeds their applicable homestead exemption, but it could be any time of asset that is not protected by an exemption.
They have debts that would not be discharged in a Chapter 7 that can either be discharged in a Chapter 13 (several types of municipal fines and violations) or paid over time in payments (recent tax liability or domestic support obligation arrears).
They have already filed for Chapter 7 bankruptcy within the past eight years and therefore are not eligible to file again. Chapter 13 can provide them with the protection and structure needed to reorganize and will provide for a discharge of debts as long as the Chapter 7 was filed more than four years before the Chapter 13.

Now that you understand the core vocabulary and the core reasons people file for Chapter 13 bankruptcy protection, we will review the process of preparing and filing a Chapter 13 bankruptcy case.

Before filing, most people consult with and retain an experienced bankruptcy attorney to guide and assist them through the process. Individuals have the right to file without an attorney, known as filing “pro se”, but it is not recommended. The bankruptcy laws can be difficult to navigate, and a small mistake can result in a very bad result, so having an attorney who knows the law and helps you navigate the process is very important. The attorney can ensure that your Chapter 13 plan of reorganization meets all of the requirements of the law while ensuring that you make the minimum viable payment for the minimal amount of time. They will also ensure that objections are resolved in a timely manner, that the plan is confirmed by the court timely and, in the event of changes in your situation, the plan is effectively modified to address the changes.

You will need to provide some documentation to your attorney in order to prepare your case for filing. Most often this includes recent paychecks, tax returns, bank statements, proof of identity and social security number, proof of insurance on financed assets and proof of title to assets. The documents you are required to provide will depend on your specific situation.

Prior to filing, individuals are required to complete a Consumer Credit Counseling Course with an approved provider. The certificate of completion of this course will be filed with your bankruptcy petition. Your attorney will advise you on how to get this done.

Your attorney will then prepare your bankruptcy petition and plan of reorganization, which you must review and sign under oath in order to have it filed. The bankruptcy petition includes:

A schedule disclosing all of your assets and their current value. You are required to disclose every asset, even those with minimal or no value, and failure to disclose an asset can lead to a denial of your discharge or worse.
A schedule stating all of the exemptions that you claim. The exemptions are what protects the equity that you have in the property you own, so it is important to maximize them in order to minimize your monthly payments.
A set of schedules disclosing every creditor to whom you owe money. Again, you must list and disclose every creditor.
A schedule of any people who cosigned for you or whom you cosigned for. Your bankruptcy will not discharge their obligation on the debt (other than spouses who file for bankruptcy together).
A full budget, showing all income in the household along with all of the ordinary expenses in the household. There are sources of income that can be excluded from your budget, which is another reason to hire an experienced bankruptcy attorney.
A Statement of Financial Affairs, which discloses a number of items regarding your recent financial history such as prior years’ income, recent transfers and payments, ongoing charitable contributions and payments made to professionals to try and address your financial situation.
The Means Test. This takes the last six months’ income of the household and compares it to the IRS average income for a similar household in the same geography. The Means Test will determine the minimum duration of the Chapter 13 plan and can determine the minimum amount that needs to be paid, so accuracy is important.
A disclosure of attorney compensation. What you pay to your attorney in fees and costs is subject to the review of the court and must be accurately disclosed.
The plan of reorganization. It is the plan that states how much the monthly payment to the trustee will be and how the creditors will be paid by the trustee over the term of the plan. Properly calculating the most effective plan payment is one of the most challenging elements of Chapter 13, so an experienced bankruptcy attorney is invaluable in this regard.

Once the petition and plan are prepared, reviewed, updated and signed, then your attorney will file the case with the federal court. The filing is almost always completed electronically.

When the case is filed, the Automatic Stay of Bankruptcy takes effect, and you are officially under the protection of the bankruptcy court. This powerful injunction requires that your creditors, with very few exceptions, stop any and all collection efforts against you. Foreclosure actions, repossessions, lawsuits, wage garnishments, calls, bills, collection letters, etc. all must stop. If a creditor persists in trying to collect, your attorney can take action against them within the bankruptcy case to make them stop and potentially pay damages for their violation.

Also, when the case is filed, the court will assign your bankruptcy trustee and your bankruptcy judge. In most cases, you will be required to make your first payment to the trustee thirty (30) days after the filing of the case, even before the 341 Meeting of Creditors is held. You will have to meet with your trustee at your Section 341 Meeting of Creditors. This meeting usually happens four to six weeks after the petition and plan are filed, allowing time for your creditors to receive notice of the meeting and make arrangements to attend if they elect to. It is rare that a creditor attends this meeting, but they are permitted to appear and ask questions. 341 meetings are held virtually in almost every jurisdiction these days.

At the 341 meeting, you will be required to provide proof of your identity and social security number. The trustee will then ask you a series of questions to validate the information that you included on your bankruptcy petition and plan and about the factors that caused you to file for bankruptcy protection. They will also confirm receipt of the first payment being made. While the Chapter 13 trustee does not represent any one party, they are tasked with ensuring that the schedules and plan are accurate and are maximizing the amount that you repay to creditors, so the trustee may ask that changes, known as amendments, are made to your petition and plan, including increasing the monthly payment.

Usually, three to four weeks after the 341 Meeting of Creditors, the court will have scheduled the initial confirmation hearing. This hearing is set to request that the court approve (confirm) the repayment plan you proposed. Between the filing of the case and the confirmation hearing, it is not uncommon to have objections filed by creditors and/or the trustee requesting that the court not approve the plan. For creditors, they are usually looking for more money, higher interest rates or better treatment under the plan. For the trustee, they are usually calling out what they believe to be an inaccuracy or over-reach of the plan (often claiming expenses are overstated and that you can afford to pay more). Your attorney will work with these parties to resolve these objections before the confirmation hearing, but often these hearings are continued to resolve these disputes and file amendments to satisfy the creditors and trustee.

Once all objections are resolved and assuming that payments to the trustee are substantially current, the bankruptcy judge will confirm the Chapter 13 plan. Once confirmed, the plan is binding on all parties and no further objections can be heard. Now you simply maintain your payments for the term of the plan until your case is complete and you receive your discharge. If life was that predictable, of course, bankruptcy courts would not be so busy.

Three to five years is a long time and often your situation will change over that time. You do have the ability seek court approval to modify your plan if your circumstances change. You must also seek court approval to take certain actions that relate to your finances, such as incurring new debt or selling an asset. The trustee can also seek modification of your plan if your income changes and it is not reported timely, or they can seek dismissal of the case if payments are not made timely and consistently. Creditors can seek relief from the Automatic Stay if payments are not made timely or if you allow required insurance to lapse.

One debt that has become a focal point in Chapter 13 cases is that of student loan debt. Historically, student loans have been excepted from discharge in bankruptcy. They could be included and paid down along with other unsecured creditors, but any remaining balances would survive the bankruptcy. Recent changes in how cases are handled have resulted in a significant amount of student loan debt being discharged in bankruptcy. In order to accomplish this, your attorney must file a mini-lawsuit in the bankruptcy called an adversary proceeding against the student loan lender and prove that not discharging the student loans would cause an undue hardship on you, the debtor. If you have student loan debt, read more here!

At some point between the filing of the case and the end of the repayment plan, you are required to take your second course, titled your Personal Financial Management Course and commonly known as “Debtor’s Education”. This course is designed to provide the basic financial foundation to ensure that you do not find yourself in a situation where you need to file another bankruptcy. It must be completed with the certificate of completion filed before the case is closed. If it is not completed timely, then the court will close your case without a discharge being granted. You may be able to file a motion to reopen the case to file the certificate of completion, but that is at the discretion of the court and there are additional court and legal fees associated with it, so it is best if you complete the course soon after filing.

Chapter 13 cases are not easy to complete and many of them do not. If you are able to complete the case, however, the rewards at the end of the case are significant. Mortgages have been brought current, vehicles and priority debts have been paid off and any remaining unsecured debt that remains unpaid is discharged. The discharge in Chapter 13 is also more powerful than that of Chapter 7 and includes some debts that would not have been discharged in a Chapter 7 bankruptcy. As a result, the fresh start that debtors receive in Chapter 13 is even more complete than that of a Chapter 7 and debtors are well positioned to successfully move forward financially.

Chapter 13 bankruptcy will stay on your credit report for seven (7) years, and it is exceptionally rare that it can be removed earlier. Your credit score will have dropped, though not as substantially as after a Chapter 7 bankruptcy. You will receive a flood of offers to incur new credit but be very careful, as the interest rates and terms on these offers are generally terrible. While certainly among worst-case scenarios, a person is allowed to file for Chapter 13 bankruptcy protection again, though they will not be eligible for a discharge unless the new filing comes at least four years after the discharge of the prior case.

There are no “quick fixes” to improve your credit situation, but it is not a life sentence either. Time and focus will allow you to recover from Chapter 13 bankruptcy quicker than you may think. There are a few basic concepts that, if embraced, will allow your credit to recover within two to four years.

Check your credit reports thirty days after your discharge. Ensure that debts included in your bankruptcy and either paid or discharged are correctly reported with zero balances. If you maintained a mortgage payment or other secured debt through the bankruptcy plan and are making payments, ensure that they are being accurately reported. Dispute any inaccuracies promptly.
Pay all bills and debt that survived the bankruptcy timely. Consistent timely payments are the most effective way to improve your credit score. For debts that survived the bankruptcy and are not on a payment plan, reach out and get them on a payment plan immediately.
Create a proper budget. To avoid falling back into the debt trap, an honest and accurate budget is necessary. There are a whole host of budgeting apps available for free online.
Save an emergency fund. Consumer finance experts say that you should have six months’ expenses saved to cover an emergency. You won’t get there immediately, but saving even a small amount from each paycheck will get you there over time and keep you from relying on incurring credit for emergencies.
Get a secured credit card or credit rebuild loan. While it sounds counterintuitive, getting a new line of credit that you use and pay monthly will help rebuild your credit over time.
Have patience. Even if you do everything right, it will take 2-4 years before your credit score recovers fully. You have hit the reset button on your finances, you need to be patient and let them recover over time.

People suffer from unexpected interruptions in their finances, causing them to fall behind on mortgages, car payments and other debts. Once their financial situation stabilizes, it can still be nearly impossible to catch up on these payments and right the ship. Chapter 13 bankruptcy can provide the time, structured payment plan and protection that the person needs to pay what they can afford to pay, then eliminate what remains, putting them back onto solid financial footing. If this situation applies to you, it is worth your while to consult with an experienced bankruptcy attorney to discuss your specific situation.