How to File for Chapter 13 Bankruptcy

Under Chapter 13 bankruptcy, you don’t have to sell your property. Instead, you’ll use your earnings to pay your debt (partially or in full) with a three- to five-year repayment plan. You’ll also need to live below your means — Chapter 13 requires you to put disposable income toward your debt. And it will impact your ability to borrow money for years.

Bankruptcy can help you with a fresh start if you’re out of options, but it’s not an overnight decision. Learning how to file for Chapter 13 bankruptcy can help you decide if this measure is right for you.

What is Chapter 13 bankruptcy?

There are several types of bankruptcy, each named according to its corresponding section of the Bankruptcy Code.

Chapter 13 (also called the wage-earner’s plan) allows you to restructure — and possibly eliminate — some of your debt. You’ll do this by following a court-approved three- to five-year repayment plan. Then, the court may discharge (or forgive) eligible debt left over after you’ve completed your repayment plan.

During the process, the court will assign you a trustee. A trustee is a neutral third party who will evaluate your case, collect your repayment and send it to your creditors on your behalf.

Filing a petition with the bankruptcy court will also give you an automatic stay. This means that most of your creditors must stop collections, garnishments, lawsuits and phone calls. Unlike with some other types of bankruptcy, the automatic stay can apply to your co-borrowers under Chapter 13.

The amount of debt that you must pay back depends on how much you earn. You’ll have to pay 100% of what you owe if the court determines you can afford it. Still, your repayment plan may give you more time to get caught up.

In general, don’t expect to have disposable income during your repayment plan. Instead, this will go toward your debt (although you will have an allowance for monthly living expenses).

Not all debt is eligible for discharge, as shown below.

The court handles secured debt a little differently — you have to pay to keep your property. Take car loans, for instance. To keep your car, you must pay your finance company the value of the car (or the full amount of what you owe, in some cases). If you don’t, your finance company can repossess it.

Chapter 13 may also save your home from foreclosure. You will, however, need to catch up on all your delinquent payments during your repayment plan.

Pros and cons of Chapter 13 bankruptcy

It’s essential to review the pros and cons of filing for bankruptcy before petitioning the court.

Who qualifies for Chapter 13 bankruptcy?

You can’t file Chapter 13 as a business or limited liability company (LLC). Instead, you’d use Chapter 11. Only individuals, sole proprietors and the self-employed can file Chapter 13.

Outside of that, you must meet the qualifications below to qualify for Chapter 13:

• Must earn a regular income
• Unsecured creditors must get at least as much as they would if you filed Chapter 7
• Repayment plan must show that all disposable income will be put toward debt
• Must have filed all taxes within the last four years
• Cannot have had a Chapter 13 discharge in the last two years, and no Chapter 7, 11 or 12 discharges in four years

• Must be current on child support and alimony
• Total debt cannot exceed $2,750,000
• No dismissed bankruptcy petitions within the last six months (in some cases)
• Must complete credit counseling at least six months before filing, as well as an additional financial management course before discharge

How to file for Chapter 13 bankruptcy

1. Complete credit counseling

You can’t file for any type of bankruptcy until you’ve completed a credit counseling course within the last 180 days.

You can use the U.S. Justice Department’s database to find an approved course provider (or this database if you live in Alabama or North Carolina).

2. Consult a lawyer

You don’t have to get an attorney, but that doesn’t mean it’s a good idea to represent yourself. Bankruptcy law is complicated, and you might want some help from a professional.

The National Association of Consumer Bankruptcy Attorney (NACBA) offers a database of NACBA member lawyers. Use it to find a bankruptcy lawyer near you.

3. File your bankruptcy petition and pay fees

The beginning of your bankruptcy journey begins when you file a petition with your local bankruptcy court.

Here, you’ll provide tax returns, a schedule of assets and debts and other financials. Whether or not you file a joint petition, you’ll also need to report your spouse’s financial information. What they earn counts as household income.

When you file, the court will charge you a $235 case filing fee and a $75 miscellaneous fee. If needed, you may be able to pay the fees in installments.

Filing your petition will trigger your automatic stay.

4. File your repayment plan and meet your trustee

If you didn’t do so when you filed your petition, you’ll have 14 days to give the court your repayment plan. The court will also issue you a trustee.

5. Begin repayment

Within the first 30 days of your filing, you have to start making repayments to your trustee. This is true even if the court has not yet approved your plan (this typically happens during your confirmation hearing).

6. Attend a meeting of creditors

Your trustee will organize a meeting between yourself and your creditors. Bankruptcy judges cannot attend.

Your trustee will put you under oath and may ask you questions about your financial situation. You will propose a repayment plan to your creditors and discuss any concerns.

7. Have your confirmation hearing

Around 50 to 75 days after you filed, the court will hold a confirmation hearing. Here is when it will approve or deny your petition and Chapter 13 repayment plan.

If the court denies your Chapter 13 petition, you can file a new plan, ask for an appeal or dismiss your case. You could also convert it to a different type of bankruptcy, if you qualify (Chapter 7, for instance). However, you must do this within 14 days of initial denial.

8. Comply with your plan

For the next three to five years, you’ll pay your trustee and they will distribute funds to your creditors. You can’t take out new debt without your trustee’s permission while under your repayment plan. You’ll need to live within a budget, since your disposable income will go toward debt.

Missing payments can have serious consequences, so you may want to opt for payroll deductions. If you fall behind, the court could dismiss your case or convert it to Chapter 7 (which means you’ll likely have to sell assets). The same can be true if you don’t pay your taxes, child support or alimony.

9. Take a financial management course

Before the court will discharge your debts, you must take a financial management course. Find an approved provider on the U.S. Justice Department’s database.

10. Debt are discharged

Upon completion of your repayment plan, the court will discharge the rest of your eligible debts.

How does Chapter 13 bankruptcy affect your credit?

The bad news: Bankruptcy hurts your credit score. The good news: Bankruptcy’s impact on your credit should diminish over time.

Typically, the lower your credit score is before you file, the less of a hit your score might take. You could see your score tumble up to 200 points if you have excellent credit.

Although not directly related to your credit score, Chapter 13 bankruptcy can show on your credit report for seven years. In contrast, Chapter 7 can appear for up to 10 years.

Chapter 13 requires a good faith effort on your part to pay back some (or all) of your debt. As a result, lenders tend to view Chapter 13 more favorably than Chapter 7. Under Chapter 7, much (or all) of your debt may be forgiven as long as you sell certain assets.

Even so, expect to have a harder time buying a house after bankruptcy (at least, for the first few years). The same can be said for getting a car loan. That said, you may be able to purchase a house as soon as one year after Chapter 13 discharge, but it depends on the type of mortgage you get.

Tips to improve your score after bankruptcy

It’ll take time to get used to life after bankruptcy, but you aren’t necessarily doomed to have bad credit forever. Here are some strategies that could help you bounce back.

Prioritize budgeting. You won’t have disposable income while you’re in repayment, so this is the time to hone your budgeting techniques. Becoming a budgeting whiz now may help you avoid getting in over your head again later.

Consider a secured card after repayment. When you’re ready, a secured credit card can help you rebuild after bankruptcy. You’ll pay the credit card company a deposit, which will also serve as your spending limit. With responsible use, you should see your score improve.

Keep an eye on your credit score. Watching your credit score rise as you make wise decisions can help you stay the course. Get your free credit score with LendingTree Spring. We’ll also give you personalized credit insights, alert you when your score changes and more.

Alternatives to Chapter 13 bankruptcy

Chapter 7 bankruptcy

Chapter 7 bankruptcy (also known as liquidation bankruptcy) is the most common form of bankruptcy. But unlike Chapter 13, it requires you to sell certain assets.

Not everyone qualifies for Chapter 7. If your income is higher than the median in your state, you must take a means test. This test proves to the court that, based on your income and current savings, you can’t afford to pay back what you owe.

Debt consolidation

Debt consolidation only makes sense if you can afford to pay what you owe. Consolidating doesn’t eliminate your debt, it reorganizes it.

With this, you’ll take out a debt consolidation loan and use it to pay off your existing loans and credit cards. Then, instead of paying multiple debt bills, you’ll only have one bill to pay — your consolidation loan.

Consolidating might also save you money on interest if you’ve improved your credit score since taking out your original loans. Also, debt consolidation loans typically come with lower rates than credit cards.

Debt management plan

When you go through mandatory credit counseling, your counselor might offer you a debt management plan as an alternative to bankruptcy.

A debt management plan works a lot like Chapter 13, but it shouldn’t tank your credit score. You’ll have three to five years to pay off your debt (in its entirety). Your credit counselor might get you lower interest rates by negotiating with your creditors. And like a trustee, they’ll handle your payments.