Chapter 13 bankruptcy lets you pay all or part of your debts in installments over a period of either three or five years. Many people who want to declare bankruptcy but have too much income to qualify for Chapter 7 end up filing for Chapter 13. Regular income allows folks in Chapter 13 to keep up with an agreed upon payment plan.
This article covers:
- Advantages of Chapter 13
- Chapter 13 Payment Plans
- Debts You Can Discharge
- Debts You Can’t Discharge
- Chapter 13 Bankruptcy Exemptions
- Figuring Out if You’re Eligible
- How to File for Bankruptcy
Advantages of Chapter 13 Bankruptcy
Most people thinking about bankruptcy will choose Chapter 7 if they qualify for it, because Chapter 7 is usually over in just a few months and it totally wipes out most debts. But Chapter 13 may be right for people who are overwhelmed by secured debt because it offers ways to:
- restructure mortgage payments to save a home from foreclosure
- reduce the amount of some secured loans to match the value of the property (called cramming down a loan), and
- reduce certain tax debts that can’t otherwise be discharged in bankruptcy.
How Chapter 13 Payment Plans Work
Under Chapter 13, you propose a plan to repay your creditors all or part of what you owe, usually using your future income. If the court approves your plan, you will make payments on your debts for either three or five years. The time and amount of your repayment plan will depend on:
- your income
- the kinds of debt you have
- the value of the property you own, and
- your expenses.
If your current monthly income is less than your state’s median income for your family size, your plan will usually be for three years. If your income is greater than the state median income, you must usually propose a five-year plan.
Debts You Can Discharge
While your plan is in force, creditors must stop collection efforts. And after you make all the payments under your plan, the court will officially discharge many—but not all—of your debts. Here are some of the most common kinds of debts discharged through Chapter 13 plans:
- credit card debt
- medical bills
- personal loans from friends, family, or others
- past-due utility bills
- past-due rent
- checks you’ve unintentionally bounced
- auto accident claims, unless you were under the influence
- amounts you owe on repossessed property
- court judgments, as long as they’re not criminal or based on fraud
- debts you agreed to pay in a divorce or separation proceeding (but not child support or alimony)
- business debts
- tax penalties or older tax debts
- collection agency accounts
Debts That Can’t Be Discharged in Chapter 13 Bankruptcy
Bankruptcy can’t get rid of every kind of debt. Even if you get a Chapter 13 discharge, the law will still require you to pay:
- certain taxes
- most student loans
- child support or alimony
- criminal fines or restitution payments
- any debts related fraud you’ve committed or injuries you’ve caused, and
- some long-term debts that are secured by collateral.
Bankruptcy Exemptions Under Chapter 13
Bankruptcy exemptions work differently in Chapter 13 bankruptcy than they do in Chapter 7. In Chapter 7, the bankruptcy trustee appointed to your case will sell your non-exempt property to pay your creditors. Under Chapter 13, the trustee won’t sell your non-exempt property—but the value of that property will be used to determine how much you must pay your creditors under your repayment plan. Either way, your creditors get the value of your non-exempt property.
Bankruptcy exemptions may include at least some of the equity in your home, your car, and personal property such as your clothes and household goods. Exemptions are determined by state law; some states have their own exemptions, while others allow you to use the exemptions provided by the federal bankruptcy code.
For more information on Pennsylvania law, see the Exemptions section of this website.
Figuring Out If You’re Eligible for Chapter 13
You may qualify for Chapter 13 bankruptcy if you have a steady income and your debts are worth less than the dollar amounts set by federal bankruptcy law. In 2022, the debt limits changed:
These amounts are adjusted every few years and set out in 11 U.S. Code, Section 109.
Chapter 13 Debt Limits, adjusted for inflation, as of April 1, 2022:
- $465,275 of unsecured debt, and
- $1,395,875 of secured debt.
New Temporary Chapter 13 Debt Limit as of June 21, 2022 until June 21, 2024.
Senate Bill # 3823, signed by President Biden on June 21, 2022, increased the Chapter 13 debt limit under 109(e) to $2.75 million, and allows both secured and unsecured debt to count towards this single limit. This change expires in two years from the date of signing (June 21, 2024) if it is not made permanent.
Required: Filed Tax Records for the past 4 Years
In addition, to qualify for Chapter 13, you must have filed your state and federal income tax returns for the past four years.
How to File for Chapter 13 Bankruptcy
If bankruptcy sounds like it may be the right solution for you, learn more about the process in How to File for Bankruptcy in Erie, Pennsylvania.
Or you may want to jump right into a more in-depth resource like Nolo’s book, Chapter 13: Keep Your Property and Repay Your Debts Over Time, which walks you through the process step-by-step, including how to fill out and file your bankruptcy forms.