If you’ve fallen behind on your mortgage, car payment, child support, or taxes, Chapter 13 bankruptcy can be a powerful tool. And it works to solve other financial problems, too. Even so, not everyone will qualify for this relief. One of the tricky aspects is that you must have enough income to fund a repayment plan for three to five years.
How Does Chapter 13 Bankruptcy Work?
With Chapter 13 bankruptcy, you can catch up or pay off your most significant obligations while paying a lesser amount toward nonessential debts. It starts by setting up a budget.
You’ll pay your necessary monthly expenses, including any monthly mortgage or vehicle payments (if you plan to keep your house or car), and domestic support obligations that you owe. Additionally, you must show that have enough income to pay other amounts in full over the course of your plan (called priority debts). These debts include things such as:
- most taxes
- domestic support arrearages, and
- claims for death or personal injury resulting from an intoxication-related motor vehicle or boat accident.
Any remaining funds are paid to your other creditors. In most cases, you must be able to sustain your budget for the duration of your three- to five-year repayment plan (more on this below). Once complete, any outstanding balances on dischargeable debt—such as credit card balances, personal loans, and medical bills—get wiped out.
As a result, at the end of your case, you’ll have paid all of your nondischargeable debt (except for your mortgage and student loans—you don’t have to repay those fully in your plan), and you won’t be responsible for paying any remaining dischargeable debt. Although it can be difficult to make it through, if you do, you’ll find yourself in a significantly better financial situation.
Who Qualifies to File for Chapter 13 Bankruptcy?
A Chapter 13 bankruptcy—sometimes called a wage earner plan—isn’t for everyone. You must meet certain qualifying criteria.
- Who can file? An individual, a married person, or a married couple can file this chapter. Although a business can’t file on its own, someone who owns a business as a sole proprietor can include the business in the case (the filer and business are considered the same when it comes to debt liability).
- Debt limitations. Your debt can’t exceed a certain amount in this chapter—the limits are $383,175 for unsecured debt (such as credit card balances and medical bills) and $1,149,525 for secured debt (such as mortgages and car payments). These figures are current as of July 2017 and adjust periodically.
- Income requirements. Finally, you must have regular, reliable income that’s sufficient to fund a three- to five-year repayment plan. Your income can come from employment, Social Security or disability benefits, a sole proprietorship, or otherwise.
Who Should File for Chapter 13 Bankruptcy?
The four most common reasons that people file for Chapter 13 bankruptcy are as follows:
- You can pay something to your unsecured creditors. Many times, people can afford to pay something to their creditors, but not the full contractual amount creditors frequently require. Instead, you’ll pay what you can to the bankruptcy trustee (within legal guidelines), and the trustee will disperse the funds to the creditor.
- You have property to protect. In Chapter 7 bankruptcy, you might have to give up some of your assets. By contrast, a Chapter 13 bankruptcy allows you to keep all of your property and pay the value of your nonexempt assets (property you can’t protect with an exemption) to your creditors.
- You have priority, nondischargeable debts. These are debts that won’t go away in bankruptcy, such as child support, alimony, and certain taxes. Even though you’ll pay these items in full through your bankruptcy plan, it’s often a more manageable amount than can be worked out directly with the creditor.
- You are behind on mortgage or car payments. Chapter 13 allows you to catch up on payment arrearages over the life of the plan, while you continue to make your ongoing payment.
What If I Can’t Make My Plan Payment?
One of the biggest benefits of Chapter 13 is that it provides flexibility. No one expects your financial situation or the circumstances of your life to remain the same for three to five years. People change jobs, move, get married, have kids, and get sick. If this happens, a Chapter 13 plan can be modified to accommodate changes in your circumstances.
You can also convert your case to Chapter 7 bankruptcy if you can’t afford to pay and you otherwise qualify for Chapter 7 case. It’s important to stay in contact with your attorney who can help you navigate the changes you will most certainly encounter during the life of your plan.
Questions for Your Attorney
- Do I qualify for a Chapter 13 bankruptcy?
- Does it make financial sense for me to file a Chapter 13 bankruptcy?
- What will my Chapter 13 plan payment be?