4 MIN READ

This Is What Happens to Your Debt When You File Chapter 13 Bankruptcy

a paper form for filing bankruptcy.
Aileen Perilla/The Penny Hoarder


We hear about bankruptcy in the news all the time. But the type we hear about most, Chapter 11, is what businesses typically use to restructure their debts.

Chapter 7 and Chapter 13 are the bankruptcy types individuals like you and I are most likely to encounter. (You can learn about Chapter 7 bankruptcy here.)

The process can get tricky fast, so keep reading to learn who’s eligible for Chapter 13 bankruptcy and how it works.

What Is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is known as a “wage earner’s plan,” because it allows working people to make a plan to repay their debt over a three- to five-year span.

While filing Chapter 13 bankruptcy may reduce or discharge much of your debt, there are a few key exceptions: alimony, child support, some taxes, federal student loans and criminal fines.

To be eligible for Chapter 13 bankruptcy, you must:

  • Have unsecured debts (credit cards, student loans, medical bills) of less than $394,725.
  • Have secured debts (property, vehicles) of less than $1,184,200.
  • Have already gone to credit counseling individually or in a group.
  • Be working with a regular income.
  • Be current on your taxes.

If you’ve filed for Chapter 13 bankruptcy in the past two years, you’re ineligible to petition for bankruptcy again.

Is Chapter 13 Bankruptcy Better Than Chapter 7?

Chapter 7 bankruptcy is often referred to as “liquidation bankruptcy.” A court-appointed trustee takes your assets and divides the funds among your creditors. You may be able to keep your home, although exemptions for property vary by state.

Chapter 7 bankruptcy is a quicker process, lasting only a few months. If you fail the Chapter 7 means test that determines your ability to pay part of your debt, you can convert your petition for bankruptcy to one for Chapter 13.

Chapter 13 is often seen as a more attractive method of filing for bankruptcy for homeowners, because it gives you a chance to save your home from foreclosure if you’re behind on your mortgage. However, you must make all mortgage payments on time during the Chapter 13 payment plan or you’ll risk losing your home.

Another key difference between Chapter 7 bankruptcy and Chapter 13 is that in the latter, your debt due to a separation or divorce may be discharged or reduced.

During your Chapter 13 payment plan, you’re not allowed to take on any new debt without court approval. Chapter 7 is not as strict.

What Happens When You File Chapter 13?

You must pay a $235 filing fee and a $75 administrative fee to file for Chapter 13, which can be paid over four installments with permission from the bankruptcy court. The bankruptcy forms ask about creditors, the amounts you owe to them, your income, your property and your monthly expenses.

Even if only one spouse is filing for bankruptcy, both parties in a married couple must provide this information.

Debt collection stops once you file your petition for bankruptcy, so that an impartial trustee can be appointed and meet with your creditors to work out a repayment plan. You’ll also attend this meeting to answer questions about your finances and your debt repayment plan. Then, within 14 days of filing for bankruptcy, your repayment plan must be submitted to the court.

Attorneys fees can often be paid back over the course of the Chapter 13 payment plan.

How Chapter 13 Repayment Works

When you file Chapter 13, you make all debt payments to a trustee, who then sends the proper amounts to creditors. You don’t have to interact directly with the parties you owe money to.

Depending on your repayment plan, you’ll make fixed payments on a regular basis by payroll deduction or direct payments. These payments start within 30 days of filing for bankruptcy, even if your payment plan hasn’t yet been approved in a court hearing.

How much will you pay? Typically, all of your disposable income, with an allowance of 15% of your gross income for charitable contributions. If your monthly income is less than the state median for a family the size of yours, you’ll pay for three years; if you make above the median income, you’ll pay for five years.  

If you have past-due amounts on a home, car or other loans with collateral, you’ll be able to pay back those balances over the length of your payment plan.

Is Filing for Bankruptcy Right For You?

Deciding to file for bankruptcy is a deeply personal choice and one to make after careful consideration.

For some, debt feels like an insurmountable obstacle, for which bankruptcy provides a way through. It also stops the barrage of calls from debt collectors while you work toward paying off debt that doesn’t get discharged in the bankruptcy process.

The black mark on your credit will last up to 10 years, but a history of missed payments and a stretched credit limit look just as bad to potential creditors.

One family The Penny Hoarder spoke with found bankruptcy to be more challenging than they originally expected. Instead of having the freedom to make simple purchases, they felt trapped by the process. They eventually used a large tax refund to leave bankruptcy early.

For others, the shame that often comes with filing for bankruptcy is worth it for a fresh start.

Lisa Rowan is a senior writer at The Penny Hoarder.

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