How to File Chapter 13 Bankruptcy

“Bankruptcy” can be a scary word. Many people imagine losing their worldly possessions and becoming a social outcast, but that’s far from the reality. Chapter 13 bankruptcy works more like a debt consolidation plan than anything else.

If you’re earning regular income, a Chapter 13 bankruptcy plan can restructure your debts to make them more affordable during a three- or five-year program, after which some of your remaining debts may be wiped out. There’s no need for an auction since you can keep all your property.

It offers many other advantages, but it can be confusing to understand at first—especially how to file for Chapter 13 bankruptcy.

What is Chapter 13 bankruptcy?

Chapter 13 bankruptcy is one of several legal support options for people who can’t repay their debts. It’s one of a few types of bankruptcy available to people and businesses in the United States:

• Chapter 7: A bankruptcy court will order some or all of your assets to be sold to repay your debts and discharge the remainder, hence the name “liquidation bankruptcy.”
• Chapter 11: A process similar to Chapter 13 bankruptcy involving a repayment plan followed by a debt discharge, but meant for individuals or businesses with a high net worth.
• Chapter 13: Known as a “wage earner’s plan,” this allows you to make affordable payments toward your debts, with some or all of it being discharged after three to five years.

There are many reasons why you might want to file for Chapter 13 bankruptcy over Chapter 7, such as being able to keep your home. Not everyone is eligible to file for Chapter 13 bankruptcy, however. You’ll need to meet the following eligibility criteria first:

• Steady income: You’ll be making monthly payments for the next three to five years, so you’ll need to have a documented source of regular income.
• Total debt: $2,750,000 or less, including all secured and unsecured debts.
• Tax returns: You must have filed all your federal tax returns within the past four years.
• Prior bankruptcies: You must not have had another bankruptcy case dismissed within the past 180 days.

Types of Chapter 13 debts

Not all debts are equal, especially when it comes to bankruptcy. In many cases, you may not be able to fully repay your debts by the end of the payment plan. To ensure the most important ones get paid, you’ll first need to calculate how much you can pay according to Form 122C-2 (Chapter 13 Calculation of Your Disposable Income).

Then, you’ll go through the list to allocate debt dollars to your monthly repayment ability, as follows:

• Priority: These are the first debts you’ll include in a repayment plan and must be paid off in full, if possible. Priority debts include things like overdue federal taxes and child support payments.
• Secured: These are debts backed by some sort of collateral, such as your car and your home. Secured debts aren’t typically discharged in bankruptcy, but they can be included in your repayment plan and are second in line to be repaid behind priority debts.
• Unsecured: These debts aren’t secured by any collateral and typically include credit cards and personal loans. They’re the last debts to be included in your repayment plan, and any remaining unsecured debts can be discharged at the end.

Note that many special provisions could impact your repayment. For example, if you’re underwater on a secured auto loan, federal courts can reduce your balance down to your car’s actual value and designate the remainder as unsecured debt. If you’re unable to pay that remaining slice of auto loan debt off by the end, it can be discharged.

Similarly, mortgages (a secured debt) get special treatment because of their sheer size: Any past-due amounts you owe are divvied up and repaid along with your normal mortgage payments each month, but nothing will be discharged.

13 steps to file Chapter 13 bankruptcy

One of the main disadvantages of Chapter 13 bankruptcy is that it’s a much slower process … as in, years long. Here’s how filing for Chapter 13 bankruptcy will work, from start to finish:

Step 1: Consult a bankruptcy attorney

There's nothing in bankruptcy law that says you have to hire an attorney, and it is possible for intrepid people to DIY their own bankruptcy case. It’s easy to understand why, given that you can expect to pay between $3,000 and $5,000 to hire a bankruptcy attorney, depending on your situation and where you live.

Experts and even the U. S. courts are pretty clear, though: You should consider hiring a bankruptcy lawyer if at all possible, given the convoluted mass of laws and statutes simmering under the surface of a 13-step bankruptcy checklist. According to Upsolve, only about 2% of DIY bankruptcy cases are successful. Your success rate increases 29X if you hire an attorney. If you can’t find one you can afford, check out legal aid clinics in your area or consult with organizations like the National Association of Consumer Bankruptcy Attorneys.

Step 2: Gather financial documents

You’ll need to show extensive details of your financial situation to many people: your attorney, the courts, your creditors, and credit counselors. Here’s what you’ll need to create:

• A list of all of your assets
• A monthly budget, including all expenses and income sources
• A list of all of your debts and their details, such as their interest rate, balance, and type

Your monthly budget can be tough to complete if you’ve never done it before, but you’ll get help with that in the next step. To put it together, you should round up the most recent copies of the following types of financial documents:

• Pay stubs
• Tax returns
• Loan statements
• Bank statements
• Credit card statements
• Retirement account statements
• Investment brokerage statements
• Titles to your home, car, and other assets

Step 3: Receive credit counseling

Sometime within the 180-day window before you officially file for bankruptcy with the courts, you’ll need to take a bankruptcy counseling course from a nonprofit agency that’s been approved by the U.S. Trustee Program, the office that oversees bankruptcies. This course typically lasts a little over an hour and costs about $50, although you may qualify for a fee waiver.

You’ll work one-on-one with a credit counselor in this session to create and review a budget. The counselor will also help you analyze whether bankruptcy is the best option in your case or whether another debt relief option might be more appropriate, such as a debt management plan. You’ll get a certificate of completion after the session is over. Keep this document safe because you’ll need to file it with your bankruptcy petition.

Step 4: File the bankruptcy petition

You’ll end up submitting dozens of pages to your local bankruptcy court when you file for Chapter 13 bankruptcy. Your attorney can help you draft these up all at once, or you can spread them out over the course of a couple of weeks. At a minimum, you’ll need to submit a formal petition document along with forms outlining your Social Security number and your creditors.

As soon as you file this document with the court, you (and any co-signers on your outstanding debts) will get an automatic stay against your creditors, which halts most debt collection efforts until the bankruptcy case is closed. You’ll also be assigned a bankruptcy trustee who will act as the go-between for you, the courts, and your creditors going forward. The rest of your bankruptcy documents can follow within a 14-day period, but filing early gets these protections in place while you work on the remaining forms.

Step 5: Pay the filing fee

You’ll also have to pay a $313 filing fee to the court clerk on the day you first file your petition for bankruptcy. If you can’t afford that fee, you can apply for an installment plan to pay it off over four months.

Step 6: Submit a repayment plan

You can file the rest of your paperwork—including a proposed repayment plan that your lawyer or credit counselor can help you create—on the same day you file your petition or up to 14 days later. This repayment plan will outline how much you’ll repay to your creditors each month, in order of each debt’s priority claims.

It’ll also outline how much you’ll request to have discharged at the end of the three- or five-year program. If you earn less than your state’s median income, you’ll typically have a three-year plan. If it’s more, you’ll usually be assigned a five-year repayment plan. You’ll also need to send a copy of this proposed repayment plan to each of your creditors.

Step 7: Court reviews the repayment plan

The court will send you and your creditors a notice of your bankruptcy filing, along with dates for scheduled court proceedings that you’ll need to keep careful track of. Your court-appointed trustee will review your case and contact you if there are any problems with your paperwork or if they need more information.

The court will schedule a creditor’s meeting sometime between 21 and 50 days after you first file your Chapter 13 bankruptcy petition. (More on that below.) However, you’ll need to start making your proposed monthly payments to the trustee within 30 days, which means you might need to send in a check before your plan is even confirmed.

If you have to send in any secured debt payments during this time, such as for your mortgage or car loan, you’ll deduct that from the amount you’ve proposed to send to the trustee and send it to your lender instead.

Step 8: Attend creditors' meeting

You’ll need to attend the scheduled creditor’s meeting in person on the assigned date. You can expect to see the trustee there, along with any creditors who wish to attend, although they rarely attend. Together, they’ll ask you questions about your financial situation, your assets, and the proposed terms of your repayment plan.

Step 9: Attend confirmation hearing

The bankruptcy court will schedule a confirmation hearing for your repayment plan within 45 days of the meeting of creditors. This is a formal court hearing with a bankruptcy judge who oversees the case and provides the final stamp of approval on the plan that you, your attorney, the trustee, and your creditors have all created. Your creditors can also attend if they wish. In some cases, the judge may propose modifications to your plan.

Once approved, it’s final: Your payment path is set for the next several years, and you’ll work with the trustee to implement your repayment plan.

Step 10: Trustee distributes your payments

You’ll now make one single payment to the trustee for all debts included in the plan, including for any secured loans you’ve been paying separately until now. The trustee will take your monthly payment, split it up, and send it to each of your lenders.

It’s crucial to ensure you make all your payments during this time because the stakes are higher while you’re working through a bankruptcy repayment period. If you fall behind on payments, your bankruptcy case could be dismissed. Consider making your payments through a payroll deduction, which can boost your odds of success. Stay in touch with your trustee if you run into financial problems.

Step 11: Attend a debtor’s education course

In addition to the credit counseling session you were required to complete before you first filed for bankruptcy, you’ll also have to complete a second “debtor’s education course” that covers the fundamentals of good financial management and how to recover from bankruptcy.

The debtor’s education course generally takes about two hours and costs around $50, and you’ll also need to take it from an approved agency. You’ll get another certificate of completion that you’ll need to file with the court. You'll need to take this course before you complete your final payment under the plan, but you can do it sooner. Experts recommend taking it as soon as possible after you first file so you don’t forget.

Step 12: Discharge

Assuming you’ve made all of your payments and filed your debtor’s education course certificate with the court, you’re nearly there: just a few more hurdles to clear. The court will hold a final hearing to make sure your debts remain eligible for discharge and then enter in a discharge order. After this, you’ll resume sending payments directly to your lenders for debts that can’t be discharged in bankruptcy, such as your student loans or mortgage. 

Step 13: Closing the case

After the discharge order is entered into the court record, your creditors have one final 14-day window to challenge the order with an appeal. If no one comes forward, congratulations: You’re no longer legally liable for those discharged debts, and you can focus on moving on with your life.

How much does it cost to file for Chapter 13?

Filing for Chapter 13 bankruptcy can be expensive, which is another major drawback, especially if you already owe money. Luckily, there are workarounds. You may be able to pay off these costs with various payment plans or fee waivers.

• Court filing fee: $313
• Required courses: $100
• Bankruptcy attorney: $3,000 to $5,000

Chapter 13 advantages and considerations

Advantages

• Keep your assets: You don’t have to get rid of any of your assets, even if you’re currently in the process of having them foreclosed on or repossessed by lenders.
• Some co-signer protections: Co-signers may have to pay debts that aren’t discharged at the end. They’ll still benefit from the automatic stay against collection efforts until then; however, your bankruptcy won’t impact them if you don’t make any late payments.
• Streamlined, affordable payments: Your disposable income will be calculated, and your debt payments will be structured to fit within that mark. Courts can even tinker with your loans, in some cases, to make the payment fit better.
• May be able to discharge some debts: Most types of unsecured debts can be discharged if you comply with the entire program, releasing you from any legal liability to repay it.
• Move on from financial hardship: The negative mark from bankruptcy falls off your credit report after seven years instead of the typical 10 years. After that, you can even rebuild a perfect 850 score if you're careful.
• Stop foreclosure proceedings and debt collection efforts: If you’re currently being hounded by debt collectors, or if your home is being foreclosed on, your lenders will be ordered to stop as soon as you file your petition for bankruptcy, until it’s complete.

Challenges

• Lack of credit: Understandably, you won’t be able to take on any additional debt without your trustee’s approval while you’re going through the repayment plan.
• Can be expensive: Filing for Chapter 13 bankruptcy can cost thousands of dollars, mostly from attorney fees. Even so, it’s highly recommended to hire one, and the money is well spent to make sure a simple mistake doesn’t cost you even more.
• Heavy credit damage: Filing for bankruptcy is one of the quickest ways to damage your credit score.
• Negative social stigma: Filing for bankruptcy is heavily frowned upon, even if it’s a lifeline for many people. That’s especially true given that your bankruptcy proceeding—including your personal finances—becomes public record.
• Complex legal procedure: There are many rules surrounding Chapter 13 bankruptcy, both at the federal and state levels. In addition, creditors may place objections you’ll need to negotiate so you can set up and implement your repayment plan.
• Lengthy, multi-year process: At a minimum, you’ll be on a three-year repayment plan, not including the time spent before and after filing. Higher-income people can expect a five-year plan. It’s estimated that two out of three cases fail before they’re complete.
• Not all debts can be discharged: Secured debts, as well as student loans, overdue child support, tax debt, and other obligations, can’t be discharged at the end of a Chapter 13 repayment plan. It’s mostly for credit cards and other types of consumer debts.
• Limits future bankruptcy eligibility: If your case is dismissed because you stopped making payments, you won't be able to file for bankruptcy again before a six-month waiting period.

FAQs

How does Chapter 13 bankruptcy work?

Chapter 13 bankruptcy is a legal process to restructure your debts, with the goal of having them paid off (or mostly paid off) after three to five years. It offers several advantages, such as stopping any foreclosure proceedings while allowing you to keep your assets.

How long does Chapter 13 bankruptcy take?

A Chapter 13 bankruptcy repayment plan can take three or five years to complete, not including the time it takes to complete pre-filing requirements and post-discharge follow-throughs.

What should I expect from my first meeting with a Chapter 13 bankruptcy attorney?

Your bankruptcy attorney will ask a lot of questions about your financial history, especially about your goals and your specific debts. Be sure to bring copies of your financial documents. They’ll help you develop a game plan for going forward and a checklist of things they’ll need to help you achieve your goals.

What’s the difference between Chapter 7, 11, and 13 bankruptcy?

Chapters 11 and 13 bankruptcy both involve setting up repayment plans for your debts, after which some or all of them will be discharged. Chapter 11 is for very high-net-worth people, however. Chapter 7 bankruptcy discharges eligible debts right away, but it liquidates some or all of your assets to do so.

How long does Chapter 13 bankruptcy affect your credit score?

A Chapter 13 bankruptcy case affects your credit for up to seven years, although it’ll fall off your report after that.