Chapter 13 bankruptcy offers a path for individuals with regular income to reorganize their debts and repay creditors over time while keeping their assets. Unlike Chapter 7's immediate discharge through liquidation, Chapter 13 involves a three to five year repayment plan that allows debtors to catch up on secured debts, protect property, and emerge with finances restructured.
How Chapter 13 Works
In Chapter 13, you propose a repayment plan to pay creditors over three to five years using your future income. A court-appointed trustee collects your monthly payments and distributes them to creditors according to the plan. Upon successful plan completion, remaining eligible debts are discharged, meaning you no longer owe them regardless of balances remaining.
You keep your property in Chapter 13, unlike Chapter 7 where non-exempt assets may be liquidated. This makes Chapter 13 attractive for debtors with significant equity in homes, vehicles, or other assets they wish to protect. The trade-off is committing future income to debt repayment for an extended period.
Who Can File Chapter 13
Chapter 13 requires regular income sufficient to fund a repayment plan. This includes wages, self-employment income, pensions, social security, and other reliable sources. Debt limits also apply, though these limits are quite high and exclude most consumer debtors. Currently, secured and unsecured debts must fall below specified thresholds that adjust periodically.
Those who fail the Chapter 7 means test often find Chapter 13 their available option. If your income is too high for Chapter 7 liquidation, Chapter 13 provides an alternative bankruptcy path. Some debtors choose Chapter 13 even when eligible for Chapter 7 because they wish to protect non-exempt property or catch up on mortgage arrears.
The Chapter 13 Plan
Your repayment plan must meet specific requirements to gain court approval. Priority debts like recent taxes and domestic support obligations must be paid in full. Secured creditors must receive at least the value of their collateral. Unsecured creditors must receive at least what they would have gotten in a Chapter 7 liquidation, and your plan must commit all disposable income for the applicable period.
Plan payments go to the trustee monthly, who then distributes funds to creditors. Payments are determined by your income, expenses, debt amounts, and what's necessary to meet legal requirements. Many debtors pay only a fraction of their unsecured debts, with remaining balances discharged upon plan completion.
Benefits of Chapter 13
Stopping foreclosure and catching up on mortgage arrears through the repayment plan is among Chapter 13's most valuable features. Debtors can cure defaults over the plan period while maintaining current payments, saving their homes when Chapter 7 couldn't help. Similarly, vehicle loans in default can be restructured to prevent repossession.
Codebtor protection shields friends or family who cosigned your debts from collection during your bankruptcy. Some debts dischargeable in Chapter 13 cannot be discharged in Chapter 7, including certain divorce-related obligations. Chapter 13 also allows filing sooner after a prior bankruptcy than Chapter 7 permits.
Completing Your Plan
Success in Chapter 13 requires making every plan payment for three to five years. Missing payments can result in case dismissal, which terminates bankruptcy protection and allows creditors to resume collection. If circumstances change, plan modifications may be possible to adjust payment amounts.
Hardship discharge may be available if circumstances beyond your control prevent plan completion, though this discharge may be more limited than the standard discharge. Planning for consistent payments throughout the plan period is essential to achieving the fresh start Chapter 13 promises.