Is filing Chapter 13 worth it?

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy, also known as a wage earner’s plan, allows those with regular income to repay some or all of their debts according to a repayment plan. With the help of a court-appointed bankruptcy trustee, debtors propose terms for repayment with monthly installments due over a set period. These proposed terms must cover the minimum amount due with other forms of bankruptcy, which can be up to 100% of your disposable income.

» LEARN: What is bankruptcy?

How does Chapter 13 bankruptcy work?

Chapter 13 bankruptcy stays on your credit report for 7 years.

In Chapter 13 bankruptcy, repayment plans work by restructuring your debt into manageable monthly payments over three to five years based on your income, expenses and debt obligations. When the debt is repaid according to the repayment plan, any remaining debts are typically discharged.

You have no contact with your creditor during the repayment period. If your repayment plan is accepted, your payments are paid to the trustee, who then distributes them to your creditors. Additionally, creditors are barred from beginning or continuing any collection efforts during the repayment period.

Debts that can be discharged in Chapter 13 bankruptcy

You are limited in which debts can be discharged under a Chapter 13 bankruptcy. Some debts, such as personal loans and credit card debt, can be discharged, but others, like your home mortgage and federal student loans, cannot be.

Source: Experian

What is a hardship discharge, and who qualifies for it?

A hardship discharge dismisses all debt when you can’t make the payments as agreed. Generally, you must meet certain requirements before one is granted. You must be unable to amend your repayment plan, and you must show that your inability to pay is beyond your control. An example would be when a serious injury or illness prevents employment. Additionally, creditors must receive as much as they would under Chapter 7 bankruptcy.

Costs and eligibility for Chapter 13

To file your Chapter 13 bankruptcy, you must pay a $235 case filing fee and a $5 miscellaneous administrative fee. These are typically paid to the court clerk and can be made in installments. You are also responsible for any attorney fees for legal aid you solicit. Bankruptcy lawyers generally cost between $1,000 and $5,000.

How much debt you need to have to file for bankruptcy depends on your total secured and unsecured debts. To be eligible for Chapter 13 bankruptcy, you must owe less than $2,750,000 as of the bankruptcy filing date. You may be self-employed or own your own unincorporated business. However, if you have filed for bankruptcy or attended a credit counseling course within the previous 180 days, additional restrictions apply.

» SHOULD YOU: File for bankruptcy?

Pros and cons of filing for Chapter 13

There are benefits and disadvantages to filing Chapter 13 bankruptcy. It lets you restructure debt into a manageable three- to five-year repayment plan, using only your disposable income while keeping assets like your home and car. It lowers monthly payments, protects co-signers, and has less credit impact than Chapter 7, falling off your credit report after seven years.

However, it limits disposable income, cannot discharge all debts (like student loans or child support), and missed payments can lead to case dismissal. While it helps avoid creditor harassment, new debts aren’t included in the plan, requiring separate payments.

Alternatives to Chapter 13

Chapter 7 and Chapter 11 are two of the most common types of bankruptcy, and they are much different from Chapter 13.

Chapter 13 vs. Chapter 7

Chapter 7 is one of the most popular forms of bankruptcy because it eliminates the majority of debt. However, Chapter 7 typically allows creditors of secured loans to seize assets to settle debts. This means you could lose your home or car. In contrast, Chapter 13 protects your assets from seizure.

Chapter 7 resolves debts much more quickly than Chapter 13. While Chapter 13 takes up to five years, Chapter 7 can discharge your debts in just a few months. To qualify for Chapter 7, you must show that your income is below the median amount for your area. Otherwise, you may have to file Chapter 13 instead.

Chapter 13 vs. Chapter 11

Chapter 11 bankruptcy also uses the courts to set up a debt repayment plan, but it is frequently used by businesses due to the costs involved. Chapter 13 is easier and more affordable, making it better suited for most individuals and couples. Chapter 13 bankruptcy may also protect co-signers, proving to be a better fit for joint loans.

» MORE: Debt settlement vs. bankruptcy

How to file Chapter 13

Filing for Chapter 13 bankruptcy involves several steps, and having legal representation is crucial. Search the American Bar’s database to find a lawyer, or contact a legal aid office for help. Specialized resources, such as Eldercare Locator for seniors are also available.

1. Submit your filing
Work with your attorney to complete and submit your bankruptcy filing. At this time, you’ll also need to pay any required fees. Once filed, creditors may no longer contact you, and foreclosure proceedings are stopped. A court-appointed trustee will notify you of upcoming meetings and deadlines that affect your filing. Within one month of filing, you must begin making payments according to your proposed repayment plan.

2. Meet with creditors
You’ll need to gather financial documents such as bank statements, pay stubs, tax returns (last four years), and loan details. About 21 to 50 days after filing, a 341 meeting (creditor meeting) is held, where creditors can ask questions and review your repayment plan. Be sure to bring all the required paperwork.

3. Creditors file claims
Next, creditors must file proof of their claims — such as unpaid bills and contracts — within 90 days of filing (or 180 days for government creditors). If you do not agree with the filing, the court should be notified immediately by either you or your attorney. Be sure to submit evidence to support your claim.

Pro tip

Before your court hearing, you should also take a court-approved credit counseling course to show responsibility and initiative. Try to complete this at least six months before you file.

4. Attend the confirmation hearing
Within 45 days of the creditor meeting, a confirmation hearing is held where the court reviews and finalizes your repayment plan. If there are any objections by either you or the creditor, this is the time to voice them before the court finalizes the repayment plan.

5. Start making payments
At this point, the bankruptcy filing process is over. It is important to practice good financial habits going forward and manage your money so you do not have to risk bankruptcy – and damage to your credit score — in the future.

Be sure to continue making payments according to the repayment plan. As you continue making payments, you should track the creditor’s statements to ensure they are accurately applying your payments to your balance. Be sure to pay any late fees that may apply.