Chapter 13 Wage Earner Bankruptcy Basics

By Cara O'Neill, Attorney
Learn whether filing for Chapter 13 bankruptcy is right for you.

Chapter 13 bankruptcy helps people with a steady income get back on their feet by reorganizing debt into more manageable payments. Not only can you pay back creditors over the course of three to five years, but you might also be able to pay less than what you owe—at least for some debts, such as credit card balances. To help you determine whether this bankruptcy type is for you, in this article, you’ll learn about the problems best solved by this chapter, qualification requirements, and more.

How Is Chapter 13 Different From Chapter 7 Bankruptcy?

One of the biggest differences is that in a Chapter 7 bankruptcy, you don’t pay back your creditors and the bankruptcy trustee—the person tasked with overseeing your case—will sell any property that you’re not allowed to exempt (protect) under your state’s exemption statutes.

By contrast, in a Chapter 13 case, you’ll make monthly payments over the course of a three- to five-year plan and the trustee won’t sell your nonexempt property (you’ll pay your creditors the value, instead). You can expect to pay back the following in your monthly plan payments:

  • house and car payments, including any past due amounts
  • priority debts, such as overdue tax bills and domestic support obligations (spousal and child support), and
  • the value of any nonexempt property.

Additionally, any discretionary funds left after meeting these payment requirements will get paid into the plan. Once you’ve satisfied your payment obligations and completed your plan, the remaining balance on any dischargeable debt will get wiped out.

(Find out more about dischargeable debt by reading Debt That Is Wiped Out In Chapter 13 Bankruptcy but Not in Chapter 7 Bankruptcy.)

Who Typically Files for Chapter 13 Bankruptcy?

If your income exceeds the median income in your state for a family of your size (after deducting allowable expenses) and you need bankruptcy relief, you’ll have to file a Chapter 13 case instead because you won’t be able to pass the Chapter 7 “means test.” Failing the means test is a common reason that people turn to Chapter 13 bankruptcy for financial help.

Even so, many people choose to file a Chapter 13 case for reasons other than failing to qualify for Chapter 7 bankruptcy. Specifically, it solves problems that a Chapter 7 bankruptcy won’t help. For instance, it will likely be the better choice for you if:

This is a brief list of a few main advantages. A knowledgeable bankruptcy attorney will be able to review your case and determine whether this chapter would be a good fit. (For more details, read How to Choose the Right Bankruptcy Chapter: When Chapter 13 Makes Sense)

Am I Eligible to File for Chapter 13 Bankruptcy?

It depends. The requirements are a bit different than the Chapter 7 requirements. Here are the basics:

  • You must have enough monthly income for a repayment plan.
  • You can’t file on behalf of a business (other than a sole practitioner).
  • Your debt cannot exceed certain debt limits.

Additionally, the length of your plan will depend on your income. If it exceeds the median income of your state, your plan will last five years. If not, you’ll pay into a three-year plan.

(For additional details about these requirements, read Do I Qualify to File for Chapter 13 Bankruptcy?)

How Does the Chapter 13 Process Work?

You and your attorney will propose a plan to pay back a certain amount to your creditors over the course of your three- to five-year plan. You’ll start paying your monthly proposed plan payment to the trustee shortly after you file.

Your creditors and the trustee will have an opportunity to object to the plan if they don’t believe that you’re following bankruptcy rules or procedure. If no one objects, or if you successfully address all objections, your matter will go to a hearing before the assigned judge who will likely confirm (approve) your plan. If the court doesn't confirm your plan, you’ll probably get additional time to correct any issues. However, the court is mandated to make sure that you submit a confirmable plan promptly so if you don’t fix your plan within the time given, the court will dismiss your case.

Once confirmed, you’ll continue making your payments to the trustee each month, and the trustee will disperse the funds to your creditors.

What Will Happen If I Can’t Continue With My Plan?

Three to five years is a long time, and during that period, it’s common for financial situations to change. For instance, a filer might get laid off, or an employer might reduce work hours. If you aren’t able to make your monthly payment, you should speak with your attorney. If possible, the attorney will ask the court to modify your plan and decrease your payment to an amount that is more affordable. If you don’t have enough income to satisfy a modified plan, then you’ll need to make another decision. Here are a few possibilities:

  • convert (transfer) your case to a Chapter 7 case
  • ask the court for a hardship discharge, or
  • do nothing and allow the court to dismiss your case.

It’s important to recognize that you might lose property if you convert your matter to a Chapter 7 case. The court will likely use the exemptions you claimed in your original paperwork—meaning that you won’t be allowed to change your exemptions to avoid giving up property—so it’s important that you’re as accurate as possible when you prepare your initial paperwork.

Hiring an Attorney

It’s not advisable to file for Chapter 13 bankruptcy in pro se (on your own). In fact, courts strongly suggest hiring an attorney because it’s difficult—if not virtually impossible—to craft a confirmable plan without professional help. Getting the preliminary advice you’ll need shouldn’t cost much because most attorneys offer free initial consultations.

Questions for Your Attorney

  • Is Chapter 13 bankruptcy the right type for me?
  • What paperwork will you need to prepare my bankruptcy?
  • Do I have to pay all of my fees up front?
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