How Does a Chapter 13 Repayment Plan Work?

Who Chapter 13 is for

Chapter 13 is sometimes called the wage earner's plan. It is for individuals with regular income who can fund a repayment plan but need a structured way to do it. Self-employed people and people operating unincorporated businesses can also file, as long as they file as individuals rather than as corporations or partnerships.

Eligibility has debt limits. The Bankruptcy Code caps the unsecured and secured debt you can have when you file, and those caps are adjusted periodically. Check the current figures on the U.S. Courts website or with an attorney rather than relying on any article's numbers.

Other requirements apply. You generally must complete credit counseling from an approved agency within 180 days before filing. You may also have to wait to file if a prior bankruptcy case was dismissed in the previous 180 days because you willfully failed to appear or follow court orders, or because you voluntarily dismissed it after a creditor asked the court for permission to recover its collateral.

How the plan gets built

A Chapter 13 case starts when you file a petition with the bankruptcy court. You file your proposed repayment plan with the petition or within 14 days after it. The filing also lists your creditors and what you owe them, your income from all sources, your property, and your monthly living expenses.

Filing triggers the automatic stay, which stops most collection actions, such as lawsuits, wage garnishments, and collection calls, subject to exceptions and court orders. Chapter 13 also has a co-debtor stay: unless the court allows otherwise, creditors generally cannot try to collect a consumer debt from someone who is liable on it with you, such as a co-signer.

A Chapter 13 trustee is appointed to your case. The trustee evaluates whether your plan meets the legal requirements and then serves as the disbursing agent, collecting your payments and distributing them to creditors.

Between 21 and 50 days after you file, the trustee holds a meeting of creditors. You answer questions under oath about your finances and the proposed plan. No later than 45 days after that meeting, the judge holds a confirmation hearing to decide whether the plan is feasible and meets the Bankruptcy Code's requirements. Creditors receive notice and may object.

You must start making plan payments to the trustee within 30 days after filing, even before the plan is confirmed. If the court denies confirmation, the options can include proposing a modified plan, converting the case to Chapter 7 where eligible, or dismissal.

How payments work

Once the plan is confirmed, you make fixed payments to the trustee on a regular schedule, typically biweekly or monthly. Payments can be made through payroll deduction. The trustee distributes the money to creditors according to the plan's terms.

Behind that single payment, the plan treats three kinds of debt differently.

Priority debts generally must be paid in full. These are debts the law gives special status, such as most taxes and domestic support obligations like child support and alimony.

Secured debts are tied to collateral, such as a car loan or a mortgage. How they are treated depends on the collateral, the loan, and specific Bankruptcy Code rules, and not every secured debt can be reduced to the collateral's current value. For example, if a car loan for a vehicle bought for personal use was taken out within 910 days before filing, the plan generally must pay the full debt, not just the car's value. A mortgage on your primary residence works differently, as described below.

Unsecured debts, such as credit cards, medical bills, and personal loans, do not have to be paid in full, but two rules set a floor. First, unsecured creditors must receive at least as much as they would have received if your nonexempt property had been liquidated in Chapter 7. Second, if a creditor or the trustee objects, you must commit all of your projected disposable income to the plan for its full term.

Disposable income is a legal term: your income minus amounts reasonably necessary to support you and your dependents, and minus charitable contributions up to 15 percent of your gross income. If your income is above your state's median, allowed expenses are generally calculated using the same standards as the Chapter 7 means test.

How long it lasts

Your income determines the plan's length. If your current monthly income is below your state's median for a household your size, the plan is generally three years, although the court can approve a longer period for cause. If your income is above the median, the plan generally must be five years. A plan can never last longer than five years.

A plan generally cannot be shorter than the applicable period unless unsecured claims are paid in full. That is the central tradeoff of Chapter 13: repayment is spread over years, and the plan works only if your income stays steady enough to fund it.

What happens to your home and car

Chapter 13 can let you stop a foreclosure and catch up on missed mortgage payments over a reasonable period of time through the plan. The automatic stay generally pauses foreclosure, although exceptions, limits for repeat filers, and court orders can affect that protection. Two conditions are firm: you must keep making the regular mortgage payments that come due during the plan, and if the foreclosure sale was completed under state law before you filed, the plan cannot undo it.

For cars and other secured property, a plan can generally reschedule secured debts, other than a mortgage on your primary residence, and extend them over the life of the plan, which can lower the monthly payment. Whether you keep the property depends on the confirmed plan, your ongoing payments, and other legal requirements.

What happens if your circumstances change

Three to five years is a long time, and the law anticipates change. A plan can be modified before or after confirmation. After confirmation, the trustee or an unsecured creditor can also ask for a modification, not only you.

If you stop making plan payments, the court can dismiss your case or convert it to Chapter 7. The same can happen if you fail to pay domestic support obligations that come due after filing or fail to file required tax returns during the case.

If circumstances beyond your control make it impossible to finish the plan, such as an illness or injury that ends your ability to work, you can ask the court for a hardship discharge. It is available only if the failure is through no fault of your own, creditors have already received at least as much as they would have in a Chapter 7 liquidation, and modifying the plan is not possible. A hardship discharge is narrower than the regular Chapter 13 discharge and does not cover debts that would not be discharged in Chapter 7.

While the plan is running, you generally may not take on new debt without consulting the trustee, because new debt could affect your ability to complete the plan.

Completing the plan

After you complete all plan payments, you are generally entitled to a discharge if you also meet these conditions:

• You certify that all domestic support obligations that came due before the certification have been paid.
• You did not receive a discharge in a prior case filed within two years for Chapter 13, or within four years for Chapter 7, 11, or 12.
• You completed an approved financial management course, if one is available in your district.

The discharge releases you from the debts provided for by the plan, with exceptions. Debts that are not discharged include long-term obligations such as a home mortgage, alimony and child support, certain taxes, most student loans, debts for death or personal injury caused by driving while intoxicated, and criminal fines or restitution included in a sentence. To the extent these are not paid in full through the plan, you still owe them after the case ends.

Situations where Chapter 13 tends to come up

These are patterns, not recommendations. Chapter 13 often comes up for people with regular income who have something specific to protect or restructure: a home with missed mortgage payments, a secured loan to reschedule, a co-signer to shield on a consumer debt, or income above the level where Chapter 7 is available without a presumption of abuse.

It can be harder to sustain when income is irregular or too tight to fund years of fixed payments. For a side-by-side look at the two most common consumer chapters, see Chapter 7 vs. Chapter 13: Which Fits Your Situation? An attorney can also explain non-bankruptcy options that may apply.