Chapter 13 bankruptcy

Chapter 13 bankruptcy — often called "wage earner's bankruptcy" or "reorganization bankruptcy" — allows individuals with regular income to keep their assets while repaying all or a portion of their debts through a court-supervised 3-to-5-year repayment plan. Unlike Chapter 7 (liquidation), Chapter 13 does not require surrendering property.

54 steps across 12 sections

1. How Much You Pay: The Disposable Income Test

  • Start with current monthly income (CMI) — average gross income over the 6 months before filing (wages, salary, tips, bonuses, self-employment income, rental income, pension, Social Security, etc.)
  • Subtract allowable expenses — using a combination of:
  • IRS National Standards (food, clothing, personal care, housekeeping)
  • IRS Local Standards (housing, utilities, transportation based on your county)
  • Actual expenses for certain categories (taxes, mandatory payroll deductions, health insurance, childcare, court-ordered payments)
  • Subtract secured debt payments — mortgage, car loan, plus any arrearage cure amounts
  • Subtract priority debt payments — past-due domestic support, certain taxes
  • The remainder = disposable income — this is the minimum you must pay monthly into the plan

2. What Gets Paid Through the Plan

  • Priority debts (must be paid 100%):
  • Back child support and alimony
  • Most federal and state tax debts
  • Wages/salaries owed to employees
  • Employee benefit fund contributions
  • Secured debts:
  • Mortgage arrears (cured over the plan)
  • Car loan payments (may be crammed down)
  • Other collateral-backed loans
  • Unsecured debts (paid last, often partial):

3. Before Filing

  • Complete credit counseling — take an approved course within 180 days before filing (costs approximately $20-$50; available online)
  • Gather financial documents — pay stubs (6 months), tax returns (4 years), bank statements, mortgage statements, vehicle loan documents, all creditor account statements
  • Consult a bankruptcy attorney — strongly recommended for Chapter 13 given the complexity of plan drafting

4. Filing Steps

  • Prepare and file the petition — includes schedules of assets, liabilities, income, expenses, and executory contracts
  • File the proposed repayment plan — must be filed with the petition or within 14 days after
  • Pay filing fee — $313 (can be paid in installments with court approval)
  • Automatic stay takes effect immediately — all collection activity, foreclosure, repossession, and garnishment must stop

5. After Filing

  • Begin plan payments within 30 days — you must start paying even before the plan is confirmed
  • Attend the 341 Meeting of Creditors — typically 20-40 days after filing; the trustee and creditors can ask questions under oath
  • Confirmation hearing — the court reviews the plan (usually 20-45 days after the 341 meeting); creditors may object
  • Court confirms the plan — once approved, the plan is binding on all parties
  • Make all plan payments for 3-5 years — payments go to the trustee, who distributes to creditors
  • Complete debtor education course — required before discharge (separate from pre-filing credit counseling)
  • Receive discharge — remaining eligible unsecured debts are eliminated

6. Curing Mortgage Arrears

  • You continue making current monthly mortgage payments directly to the lender during the plan
  • All past-due mortgage payments (arrears) are spread across the 3-5 year plan and paid through the trustee
  • At the end of the plan, your mortgage is current — the arrearage is fully cured
  • Critical requirement: You must have enough income to cover both your regular mortgage payment AND the arrearage cure payment (plus other plan obligations)

7. Lien Stripping (Junior Mortgages / HELOCs)

  • The stripped lien is reclassified as unsecured debt
  • It is paid at the same percentage as other unsecured debts (often pennies on the dollar)
  • At discharge, the lien is permanently removed from your property

8. Limitations

  • You cannot cram down your primary residence mortgage — the anti-modification provision (11 U.S.C. Section 1322(b)(2)) prohibits reducing the principal balance or interest rate on your primary home mortgage
  • You MUST remain current on all mortgage payments that come due during the plan
  • If you fall behind on post-filing mortgage payments, the lender can ask the court to lift the automatic stay and resume foreclosure

9. How It Works

  • Reduce the loan balance to the vehicle's current market value
  • Reduce the interest rate to a court-approved rate (typically prime + 1-3%, often around 5-7%)
  • Pay the reduced amount over the life of your plan

10. Example

  • You owe $18,000 on a car worth $10,000
  • Cramdown reduces your secured debt to $10,000
  • The remaining $8,000 becomes unsecured debt (paid at whatever percentage your plan pays unsecured creditors)
  • Interest rate may drop from 15% to ~6%

11. Court Fees

  • Filing fee: $313 (can be paid in up to 4 installments with court permission)

12. Attorney Fees

  • Typical range: $2,500 - $6,000 (varies significantly by region and complexity)
  • National average: approximately $3,000 - $4,000
  • Key advantage: Attorney fees can be paid through the plan — you typically pay a small amount upfront ($0-$1,500) and the rest through monthly plan payments
  • Complex cases (business debts, multiple properties, contested plans) can run $6,000+

Common Mistakes

  • Not making payments on time
  • Incurring new debt without court approval
  • Failing to file tax returns
  • Not reporting income changes
  • Ignoring direct-pay obligations

Pro Tips

  • Start gathering documents early
  • Build a budget before filing
  • Use payroll deduction
  • Communicate with your trustee
  • Attorney fees through the plan

Sources

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