Chapter 13 is the bankruptcy chapter for people who have an income and something to protect. Instead of eliminating debt in a few months, it places every creditor on a single court-approved payment plan that lasts three to five years and is sized to what you can actually afford.
While the plan runs, foreclosure, repossession, garnishment, and collection are stopped. When the last payment is made, whatever remains of your unsecured debt is discharged.
A Chapter 13 case asks more of you than a Chapter 7 case does, and for longer. This article follows a Chapter 13 case in the order it progresses.
What Chapter 13 Can Do
- Save a home from foreclosure. Missed mortgage payments are spread over the life of the plan while you resume the regular monthly payment.
- Keep property that Chapter 7 would put at risk. You keep it by paying creditors its unprotected value over time.
- Put tax debt and support arrears on a schedule. The IRS and the state must accept payment through the plan.
- Restructure certain secured debts. Some car loans can be reduced to the value of the vehicle, with a lower interest rate and new repayment terms. A second mortgage with no equity behind it can sometimes be removed.
- Protect co-signers. A creditor generally may not pursue someone who co-signed a consumer debt while the plan is in effect.
Who qualifies
Chapter 13 is open to an individual with regular income, whether from wages, self-employment, a pension, or Social Security. For cases filed today, unsecured debts may not exceed $526,700 and secured debts may not exceed $1,580,125. Congress has recently passed a bill replacing those figures with a single limit of $2,750,000, which takes effect once signed into law. You must also have filed your tax returns.
Evaluation
Finding out whether a plan is affordable before you commit to one.
A Chapter 13 case succeeds or fails on one number: the monthly plan payment. We work that number out before filing, not after.
What the plan must pay
Some debts must be paid in full through the plan: mortgage arrears on a home you are keeping, missed car payments, recent taxes, and support arrears. Credit cards, medical bills, and other unsecured debts are paid from whatever your budget has left over. In many cases that is only a small part of what is owed, and the rest is discharged when the plan ends.
The three tests
- Disposable income. You commit what is left of your income after reasonable and necessary living expenses. If your income is above the California median, the plan runs five years. If it is below, three years is the standard.
- Liquidation. Unsecured creditors must receive at least what they would have received had you filed Chapter 7.
- Feasibility. The budget has to show that you can actually make the payment every month.
An honest budget
We build the budget from your real pay stubs and bank statements. A plan based on a hopeful budget is the most common reason Chapter 13 cases fail, and a failed case can leave you worse off than before. If the numbers do not work, we say so and look at the alternatives.
The Petition and the Plan
Putting your finances and your proposal in front of the court at the same time.
The petition
The petition, schedules, and supporting documents are much the same as in Chapter 7: pay stubs, tax returns, bank statements, identification, and a credit counseling course completed before filing.
The plan
The plan is the document that distinguishes Chapter 13. This district requires a standard form, which states the monthly payment, the length of the plan, and how each kind of creditor will be treated: the mortgage arrears, the car loan, the taxes, and the percentage to be paid to unsecured creditors. It is filed with the petition or within 14 days.
Emergency filings
When a foreclosure sale or repossession is days away, a case can be opened with a short petition and the rest of the documents filed within 14 days. It works, but it leaves no margin. We use it only when the calendar leaves no choice, and we can take on an emergency filing only when time and our caseload permit.
The First Weeks
Starting the payments and getting through the trustee’s review.
The automatic stay
Filing stops the foreclosure, the repossession, the garnishment, and the lawsuits, as it does in any bankruptcy. In Chapter 13 the protection also extends to co-signers on consumer debts.
Plan payments begin within 30 days after filing, before the court has approved the plan. From the filing date forward you also resume the regular mortgage payment, on time, every month. Missing either one early in the case is the fastest way to lose it.
The meeting of creditors
About a month after filing, you answer questions under oath from the Chapter 13 trustee, who administers every case in the division. The trustee examines your budget closely and will often ask for more documents afterward. We prepare you and attend with you.
Creditors file their claims
Creditors must file a proof of claim to be paid through the plan. We review each one. Mortgage arrears claims in particular often include fees and charges that deserve a second look, and we object when a claim is wrong.
Confirmation
Getting the court’s approval, which binds every creditor to the plan.
The court holds a confirmation hearing after the meeting of creditors. Before it, the trustee and any creditor may object to the plan.
Objections are normal
An objection from the trustee is a routine part of the Chapter 13 process, not a sign the case is in trouble. Most ask for a missing document, question an expense, or point out that a claim came in higher than the plan assumed. We resolve them by supplying the document or amending the plan.
Motions decided along the way
If the plan depends on valuing a vehicle or removing a junior mortgage, that is done by a separate motion, supported by an appraisal or other evidence, and decided by the judge.
The confirmation order
Once the judge confirms the plan, it is binding. Creditors must accept the payments the plan provides and may not collect in any other way while you perform.
The Plan Years
Making the payments, handling what life changes, and earning the discharge.
For the next three to five years you make one payment a month to the trustee, who distributes it to creditors under the plan.
Your obligations
- Make every plan payment and every regular mortgage payment on time.
- File your tax returns each year and provide copies to the trustee.
- Do not take on significant new debt, such as a car loan, without the court’s approval.
- Report meaningful changes in income, and keep your home and vehicles insured.
When life changes
Few budgets survive five years unchanged. If you lose a job, become ill, or have a major expense, the plan can be modified to lower or pause the payments. If the plan can no longer work at all, the case can often be converted to Chapter 7. The time to call us is before a payment is missed. A case that is dismissed for non-payment ends the automatic stay, and the foreclosure can resume.
Completion and discharge
After the final payment, you complete a financial management course and certify that any support obligations are current. The court then enters the discharge. The remaining balances on credit cards, medical bills, and other unsecured debts are eliminated, the mortgage is current, and the arrangements made in the plan become permanent.
Chapter 13 Compared With Chapter 7
| Topic | Chapter 7 | Chapter 13 |
|---|---|---|
| Length | About three to four months. | Three to five years. |
| Payments to creditors | None from future income. | Monthly, based on what you can afford. |
| Home in foreclosure | Delays the sale but does not cure the default. | Stops the sale and cures the default over time. |
| Income limit | Yes, the means test. | No, but debt limits apply. |
| Discharge | At the end of the case. | After the last plan payment. |
If you qualify for Chapter 7 and have nothing at risk, it is usually the faster and less expensive answer. If your debts exceed the Chapter 13 limits and come mostly from a business, Chapter 11, Subchapter V may be the right chapter instead.
What It Costs
The court’s filing fee for a Chapter 13 case is $313. The Chapter 13 trustee is paid a percentage of each plan payment, which is built into the payment amount.
Attorney fees in Chapter 13 are subject to court approval, and in most cases a large part of the fee is paid through the plan instead of up front. We explain the fee and how it will be paid at the first meeting, before any commitment is made.
- Pay stubs for the last seven months, or other proof of income
- Tax returns for the last two years
- Your mortgage statement and any notice of default or notice of sale
- Car loan statements and recent bank statements
- Any letters from the IRS or the Franchise Tax Board
Gregory Grigoryants is a California attorney (State Bar No. 286804) who has represented individuals, families, and business owners in bankruptcy, debt collection defense, and tax resolution matters for more than 13 years. He practices from offices in Sherman Oaks and Beverly Hills and speaks English and Russian.