This is What Happens to Your Debt When You File Chapter 13 Bankruptcy

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When debts become overwhelming, many people seek one of two types of bankruptcy for relief, depending on their income and needs.

For example, people with little income remaining at the end of each month and minimal assets usually choose to file for Chapter 7 bankruptcy, the chapter that wipes out (discharges) qualifying debt in four to six months without the need to repay creditors.

If debt starts to accumulate, or if you face the potential of losing the roof over your head, this Phoenix bankruptcy lawyer would readily lend a helping hand.

On the other hand, people who earn a significant income or who want to protect valuable property will file for Chapter 13 bankruptcy. In exchange for debt relief, these filers pay their discretionary income to their creditors over the course of a three- to five-year repayment plan.

This article will focus on Chapter 13 bankruptcy and everything you need to know about it.

What is Debt
What is Bankruptcy
How Does Bankruptcy Work
What is Chapter 13 Bankruptcy
How Chapter 13 Works
The Chapter 13 Process
Chapter 7 vs. Chapter 13
Do You Pay Back All Your Debt in Chapter 13 Bankruptcy
What Happens at The End of Chapter 13 Bankruptcy
What Happens to Credit Card Debt in Chapter 13
How Much Should You Be in Debt Before Filing Bankruptcy
Can You Get a Loan After Bankruptcy?
How Long Does it Take For Chapter 13 to be Approved
What Is The Success Rate of Chapter 13
Which Is Better Chapter 11 or Chapter 13
How Can You Fix Your Credit While in Chapter 13

What is Debt

Debt is an amount of money borrowed by one party from another. Debt is used by many corporations and individuals as a method of making large purchases that they could not afford under normal circumstances.

A debt arrangement gives the borrowing party permission to borrow money under the condition that it is to be paid back at a later date, usually with interest.

What is Bankruptcy

Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor’s assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

How Does Bankruptcy Work

Bankruptcy offers an individual or business a chance to start fresh by forgiving debts that simply cannot be paid while giving creditors a chance to obtain some measure of repayment based on the individual’s or business’s assets available for liquidation.

In theory, the ability to file for bankruptcy benefits the overall economy by allowing people and companies a second chance to gain access to credit and by providing creditors with a portion of debt repayment.

Upon the successful completion of bankruptcy proceedings, the debtor is relieved of the debt obligations that were incurred prior to filing for bankruptcy.

What is Chapter 13 Bankruptcy

Chapter 13 is less about the elimination of debt and more about the reorganization of an individual’s finances. The Chapter 13 process requires that the debtor (that’s what we call the person who files the bankruptcy case) make a monthly payment to a Chapter 13 Trustee for a period of 36 to 60 months. The Trustee then distributes that money to the debtor’s creditors who have filed proper claims.

One of Chapter 13’s most attractive features is the chance to keep your home as long as you can pay the mortgage under a settlement plan.

Under Chapter 13, people have three to five years to resolve their debts while applying all their disposable income to debt reduction. The option allows applicants to eliminate unsecured debts while catching up on missed mortgage payments.

Short-circuiting home foreclosure is one of the option’s most attractive features. Though keeping your home can be a major relief, you’re required to spend years living under the supervision of a court-appointed trustee who will collect and distribute your payments.

How Chapter 13 Works

Chapter 13 bankruptcy is like Chapter 11, which applies to businesses. In both cases, the petitioner submits a reorganization plan that safeguards assets against repossession or foreclosure and typically requests forgiveness of other debts. They both differ from the more extreme Chapter 7 filing, which liquidates all assets except those specifically protected.

No bankruptcy filing eliminates all debts. Child support and alimony payments aren’t dischargeable, nor are student loans and unpaid taxes. But bankruptcy can clear away many other debts, though it will likely make it harder for the debtor to borrow in the future.

To be eligible to file for Chapter 13 bankruptcy, an individual must have no more than $394,725 in unsecured debt, such as credit card bills or personal loans. They also can have no more than $1,184,200 in secured debts, which includes mortgages and car loans. These figures adjust periodically to reflect changes in the consumer price index.

One of Chapter 13 allows you to stop an effort to foreclose on your home. Filing a Chapter 13 petition suspends any current foreclosure proceedings and payment of any other debts owed.

This buys time while the court considers the plan, but it does not eliminate the debt. Hopefully, the bankruptcy plan will free enough of your income that you’ll be able to make regular mortgage payments and keep your house.

The Chapter 13 Process

First, you should find a bankruptcy attorney who can provide you with a free evaluation and estimate to file.

The cost to file Chapter 13 bankruptcy consists of filing fees and fees charged by a bankruptcy attorney. Applicants need to pay a $235 filing fee to the bankruptcy court, as well as a $75 miscellaneous administrative fee. They also need to provide:

A list of creditors and the amount of their claims
Disclosure of the amount and sources of the debtor’s income
A list of the debtor’s property, as well as an accounting of all contracts and leases in the debtor’s name
A breakdown of the debtor’s monthly living expenses
Tax information, including a copy of the debtor’s most recent federal tax return and a statement of any unpaid taxes.

Chapter 13 petitioners must stipulate that they haven’t had a bankruptcy petition dismissed in the 180 days before filing due to their unwillingness to appear in court. Also, anyone seeking bankruptcy protection, must undergo credit counseling from an approved agency within 180 days of filing a petition.

Shortly after filing, the debtor also must propose a repayment plan. A bankruptcy judge or administrator will hold a hearing to determine whether the plan meets the requirements of the bankruptcy code and is fair. Creditors may raise objections to the plan, but the court has the final say.

Debtors can arrange to make up delinquent payments over time, but under Chapter 13 rules, all new mortgage payments from the time of filing must be made on time.

The debtor also must work with a mediator, or trustee, who distributes payments to the creditors. The debtor is not required to have any direct contact with his or her creditors under Chapter 13. In fact, all creditors are required by law to cease any attempts to recover the debts covered under the Chapter 13 process if all terms of the agreement are being met.

You must stick to the basics of your settlement. No late payments are permitted. You’ll be allowed to accelerate your payments, allowing you to seek an early discharge from the agreement.

Conversely, if your financial situation worsens, it’s up to you to inform the bankruptcy trustee and seek a modification of the plan, if necessary. Failure to comply with the terms, especially failure to make payments on time, could result in you case being dismissed.

Chapter 7 vs. Chapter 13

Chapter 7 bankruptcy forces you to liquidate a great many assets to repay creditors. But the process can be concluded relatively quickly, and any wages and property you acquire after the bankruptcy filing, except inheritances, aren’t subject to distribution to your creditors. Typically, the entire process is completed within six months.

But Chapter 7 has disadvantages, too. Lenders who have already filed to foreclose on your home are only temporarily stalled, and other debts such as mortgage liens can be collected after the case is concluded. Cosigners on your debt are still obligated to pay.

Seeking Chapter 13 protection allows you to keep all your property. It simply extends the amount of time you have to repay what you owe after the bankruptcy court issues its ruling. It is possible to file a Chapter 13 bankruptcy after a Chapter 7 is completed, allowing you to seek a reduction in whatever debts remain from a Chapter 7 discharge.

Chapter 13 also protects your loan cosigners against collection efforts if the bankruptcy settlement obligates you to repay the debt yourself.

There are disadvantages as well. Legal fees can be higher in Chapter 13 cases than Chapter 7 and your obligation to repay can last for years. In Chapter 7, the settlement ends most debt obligations.

Do You Pay Back All Your Debt in Chapter 13 Bankruptcy

In Chapter 13 bankruptcy, you must devote all of your “disposable income” to repayment off your debts over the life of your Chapter 13 plan. Your disposable income first goes to your secured and priority creditors. Your unsecured creditors share any remaining amount.

What Happens at The End of Chapter 13 Bankruptcy

After completing a Chapter 13 repayment period that lasts a minimum of three years and a maximum of five, most debtors receive a discharge from the bankruptcy court.

Section 1328 of the Bankruptcy Code sets out the discharge eligibility of a Chapter 13 debtor. This section states that a Chapter 13 debtor is entitled to a discharge upon completion of all payments under the Chapter 13 repayment plan so long as the debtor:

certifies (if applicable) that all domestic support obligations that came due prior to making such certification have been paid;
has not received a discharge in a prior case filed within a certain time frame (two years for prior Chapter 13 cases and four years for prior Chapter 7, 11 and 12 cases); and
has completed an approved course in financial management.

The discharge injunction stops creditors from seeking payment from the debtor for all debts provided for by the plan or disallowed under Section 502, with limited exceptions. Discharged creditors may no longer initiate or continue any legal or other action against the debtor to collect the discharged obligations.

As a general rule, the discharge releases the debtor from all debts provided for by the plan or disallowed, with the exception of certain debts referenced in Section 1328.

Debts not discharged in Chapter 13 include certain long term obligations (such as a home mortgage), Domestic Support debts such as alimony or child support, some taxes, most student loans, debts arising from death or personal injury caused by driving while intoxicated, and debts for restitution or a criminal fine.

To the extent that they are not fully paid under the Chapter 13 plan, the debtor will still be responsible for these debts after the bankruptcy case has concluded.

What Happens to Credit Card Debt in Chapter 13

Credit cards generally have the lowest priority in a Chapter 13 plan. Credit card debts are general unsecured debts. General unsecured debts are at the bottom of the barrel; how much they get paid depends upon a number of factors, but usually Chapter 13 debtors do not have to pay their credit card debts in full.

Beware though. Some credit card debt is secured. If it is, the payment priority will be that of a secured debt.

However, you must also pay whatever you can afford into your plan — so if you can afford to pay more than just your secured and priority debts, you will be required to do so. The credit card companies will receive a percentage of what is owed to them based on this leftover amount.

How Much Should You Be in Debt Before Filing Bankruptcy

There is no minimum debt requirement in bankruptcy. How much debt you have is certainly an important consideration when determining whether bankruptcy is in your best interest. But more importantly, whether it makes sense for you to file for bankruptcy depends on:

whether you are able to repay your debts outside of bankruptcy
whether your creditors are willing to work with you
whether you can discharge (wipe out) the types of debt you have in bankruptcy, and
the facts of your individual case.

While there is no minimum debt amount required to file for bankruptcy, you can’t have more than $1,257,850 in secured debt or $419,275 in unsecured debt if you want to file for Chapter 13 bankruptcy (these amounts, which are adjusted periodically to account for inflation, are valid as of April 2019).

What Happens to Debt in Chapter 13

When you’re filling out your bankruptcy paperwork, you’ll want to know how to divide your debts into unsecured and secured categories. The quick rule is that a secured creditor can take the property you bought if you don’t pay the bill. An unsecured creditor cannot.

For instance, most buyers give a home lender a lien on the financed home. The lien gives the lender an interest in the home or “collateral.” Because the lender can sell the property if the borrower fails to pay the mortgage, the mortgage is a secured debt.

By contrast, most credit card debt is unsecured debt. A credit card lender can’t take back the school clothes or pet supplies charged with the card if the borrower fails to make the monthly payment. Child support arrearages and unpaid gym membership fees are also unsecured debts.

Do You Get Out of All Debts When You Declare Bankruptcy?

Bankruptcy doesn’t cure all debt problems. Here’s what it can’t do for you.

Prevent a secured creditor from foreclosing or repossessing property you can’t afford. A bankruptcy discharge eliminates debts, but it doesn’t eliminate liens. A lien allows the lender to take property, sell it at auction, and apply the proceeds to a loan balance.

The lien stays on the property until the debt gets paid. If you have a secured debt (a debt where the creditor has a lien on your property), bankruptcy can eliminate your obligation to pay the debt, but it won’t take the lien off the property—the creditor will still be able to recover the collateral.

For example, if you file for Chapter 7 bankruptcy, you can wipe out a home mortgage; however, the lender’s lien will remain on the home. As long as the mortgage remains unpaid, the lender can foreclose on the home (once the automatic stay lifts, of course).

Eliminate child support and alimony obligations. Child support and alimony obligations survive bankruptcy, so you’ll continue to owe these debts in full, just as if you had never filed for bankruptcy. And if you use Chapter 13, you’ll have to pay these debts in full through your plan.

Eliminate student loans, except in very limited circumstances. Student loans can be discharged in bankruptcy only if you can show that repaying the loan would cause you “undue hardship,” which is a very tough standard to meet. You must prove that you can’t afford to pay your loans currently and that there’s very little likelihood you can do so in the future.

Eliminate most tax debts. Eliminating tax debt in bankruptcy isn’t easy, but it’s sometimes possible for older unpaid tax debts.

Eliminate other nondischargeable debts. The following debts aren’t dischargeable under either chapter:

debts you forget to list in your bankruptcy papers (unless the creditor learns of your bankruptcy case)
debts for personal injury or death due to intoxicated driving, and
fines and penalties imposed as a punishment, such as traffic tickets and criminal restitution.

If you file for Chapter 7, these debts will remain when your case is over. In Chapter 13, you’ll pay these debts in full through your repayment plan.

Chapter 13 Repayment Plan

The Chapter 13 repayment plan is the legal document that lays out how you’ll pay back your creditors. It must be drawn up and filed with the bankruptcy court within 14 days of filing the bankruptcy petition (unless you get an extension), after which the judge and your creditors will have a chance to assess and possibly challenge the plan. If the court ultimately OKs your plan, you’ll then follow through to pay back your eligible debts.

It’s possible to DIY your own Chapter 13 plan, but the process can be complicated and detail-heavy. That’s why it’s best to work with a bankruptcy lawyer, who can help make sure your repayment plan meets all requirements for approval.

The debts you’ll pay off

Not all of your debts are treated equally under Chapter 13 bankruptcy — some might not even have to be paid in full. Generally, your debts will be split into three different categories in your Chapter 13 repayment plan.

Priority debts

Priority debts are those that must be paid off during the course of your plan, with certain exceptions. These are debts like back taxes you owe, the cost of filing for bankruptcy, and child- and spousal-support payments that need to be brought current.

Secured debts

Secured debts are those that are backed by collateral — a home mortgage or auto loan, for example. Depending on the specifics of the secured loan, you can be required to pay back the value of the collateral or the full payment of the debt. We recommend reaching out to an attorney to learn more about the proper treatment of secured claims in the plan.

Unsecured debts

Last are unsecured debts, like those from credit cards, unsecured personal loans and medical bills. These debts get the last slice of the pie, which means that it’s totally possible for your unsecured creditors not to be paid in full by the end of your Chapter 13 repayment plan. If that happens, those debts may eventually be discharged.

Creating and filing the repayment plan

Once the means test is complete, you can start to work on drafting the repayment plan itself. The details of the plan will depend on your unique debts and the disposable income you calculated during the means test, so we strongly advise that you work on it with a trained expert like a bankruptcy lawyer. Not all Chapter 13 filers need the same advice for creating a repayment plan.

After you create your repayment plan, you’ll need to file it with the bankruptcy court no later than 14 days after filing. The court will assess the plan and hold a hearing to give your creditors a chance to make any objections. If all goes well, the plan will be approved. Keep in mind that although approval may not happen until roughly three months after filing, you’ll still have to start making payments on the plan within 30 days after you file.

The average payment for a Chapter 13 case overall is probably about $500 to $600 per month. This information, however, may not be very helpful for your particular situation. It takes into account a large number of low payment amounts were low income debtors are paying very little back.

Then it averages out the larger payments of $1000 to $2000 or more. These higher-payment-cases are usually due to higher income and housing repayment requirements. Cases in the $500 to $600 range are very common and reflect debtors who are usually paying at least one automobile through the plan and possibly some other “average-type” repayment requirements.

When You File Chapter 13, Do They Take Your Tax Refund

People who file for Chapter 13 bankruptcy must pay all of their disposable income into the Chapter 13 plan—that is, any income not used for reasonable and necessary expenses, such as food, transportation, and shelter.

When you receive a tax refund during a Chapter 13 bankruptcy, the trustee might consider those funds disposable income if they represent funds that weren’t included in the income and expense calculations used to support your Chapter 13 plan.

Also, the Chapter 13 trustee might argue that since you can afford to pay all your necessary expenses and make your plan payment on your monthly income alone, the tax refund is a surplus and is disposable income that you must pay into the plan.

If you can show that the trustee’s analysis is incorrect, the court might find that the return isn’t disposable income and let you keep the money.

Example. For Ashley’s Chapter 13 plan to work, she must pay $1,000 per month to the trustee. Her income from work is just enough to cover her reasonable and necessary expenses plus the plan payment. She ends up falling behind and needs her tax refund to catch up on her electrical bill.

The court might excuse the tax bill if she shows that she fell behind because she didn’t claim enough deductions and the money slated to pay her electric bill was withheld for unnecessary taxes. By contrast, it’s unlikely that the court will excuse the tax refund if Ashley received a raise and the tax refund represents money not accounted for in her plan

Can You Pay Off Chapter 13 early

If you’re in the middle of a Chapter 13 bankruptcy, and your financial picture starts looking rosy, it’s understandable that you’d want to pay off your repayment plan early—but don’t count on being let out of your plan.

In fact, it’s more likely that your monthly payment will increase because your creditors are entitled to all of your discretionary income for the duration of your three- to five-year repayment period.

It’s unlikely that the court will grant you a discharge wiping out a debt balance if you don’t pay your disposable income for your entire commitment period. Much like a contract, you must do certain things before you’re entitled to the discharge. Here are the terms you agreed to:

to pay all of your disposable income to your creditors (or the value of your nonexempt property, whichever is greater)
for three to five years, and
in exchange, at the completion of the three- to five-year period, your nonpriority, unsecured debt balances would be wiped out.

If you don’t fulfill all the terms, you don’t receive a discharge.

There is one situation where the court will allow you to pay off your plan early—and that’s when you pay creditors 100% of their claimed amounts. If you pay all that you owe, there won’t be a need for a payment plan. You won’t need a discharge, and your creditors will be made whole.

Requesting an Early Discharge Due to Hardship

If you suffer a financial setback, and your plan pays less than 100% of what you owe, the court might end your plan early if your situation doesn’t look like it will improve. Here are the requirements for a hardship discharge:

You’ve paid your creditors at least as much as they would have received in a Chapter 7 bankruptcy.
You’ve suffered a change of circumstances due to no fault of your own.
There’s no reason to believe your financial condition will improve.
A payment modification isn’t practical because you don’t have enough discretionary income to support a plan.

If you successfully prove these criteria, the court will end your plan early, grant you a hardship discharge, and wipe out your nonpriority, unsecured debt (except student loans).

Does Your Credit Score Increase While in Chapter 13?

Chapter 13 can fix credit scores. For some individuals, there may be a slight boost in their credit scores after filing bankruptcy according to Smart Money.

Chapter 13 Can Fix Credit Scores By Cleaning Credit Reports

When people declare personal bankruptcy, their credit reports are wiped clean. In other words, the late payments, unpaid accounts and high balances are removed from the negative column of the credit reports. Instead, they are labeled as included in Chapter 13 wage earner plan, according to Smart Money. With negative information removed from individuals credit reports, their credit scores will likely receive a jump, but won’t fall any lower.

Chapter 13 Allows People To Fix Credit Quicker Than Other Debt Management Options

Debt management options are often used to avoid filing bankruptcy. However, they won’t fix credit as quick as chapter 13 may. Let’s take debt consolidation, for example. When people file bankruptcy they can immediately start trying to fix their credit. However, debt consolidation can require people to wait 6 to 8 years to complete the program and fix credit, according to Molleur Law.

The Long Term Results Of Chapter 13 Can Improve and Fix Credit

Granted, when people file chapter 13, it stay on their credit report for approximately 10 years. However, long term bankruptcy still helps individuals wanting to fix credit. For instance, people’s credit score can improve because they aren’t compared with the general public. Instead, their scores are compared with other bankruptcy filers. Thus, their scores won’t tank because they’re compared to people with excellent credits scores and no bankruptcies listed.

Do You Have to Include All Credit Cards in Chapter 13

When you file for bankruptcy, the law requires that you provide a list of all of your creditors. A credit card, however, is not always a creditor.

WHY ISN’T A CREDIT CARD ALWAYS A CREDITOR?

A credit card isn’t always a creditor because the bankruptcy code defines “creditor” as someone who has a claim for money against the debtor.

If there is a balance on the card, then the credit card company has a claim for that balance, and is a creditor
If there is no balance on the card, then the card company doesn’t have a claim, and they are therefore not a creditor

So a card without a balance does not need to be listed in your bankruptcy, and the credit card company might decide to let you keep it open.

WILL THE CREDIT CARD COMPANY LET YOU KEEP CREDIT CARD?

Probably not. Most credit card agreements have a term, which says that if you file for bankruptcy, then they can close the account. The credit card company almost always has the right to cancel the account at their sole discretion.

From experience:

Sometimes they cancel the card automatically when you file bankruptcy, but
Sometimes they don’t

It really depends on the policies of the lender.

What Will You Lose if You File Bankruptcy

While the bankruptcy laws around what you can keep in a bankruptcy vary from province to province, all provincial governments have set limits on what a trustee can take. These limits are called personal bankruptcy exemptions and for the most part, cover the necessities of life. The assets you can keep in bankruptcy, within certain dollar limits, include:

household goods (food, furniture, etc.)
personal belongings (clothing)
your car
tools of the trade
pensions and retirement savings

What You Cannot Keep

Savings Bonds, TFSA’s and RESP’s can be seized in bankruptcy as they are essentially cashable savings accounts. However, most people contemplating bankruptcy have depleted their savings accounts many months before filing a bankruptcy in an effort to avoid bankruptcy so this is not usually an issue. If you still have savings a consumer proposal might be a better option for you than bankruptcy as you may be able to keep some or all of your savings in a proposal.

Most people worried about losing an asset in bankruptcy would choose to file a consumer proposal instead. In a consumer proposal, you can keep control of all your assets regardless of their value.

What is The Maximum Income to Qualify For Chapter 13

What is The Minimum Chapter 13 Plan Payment

Here is an example of the basics of calculating a Chapter 13 plan payment:

Start with	Yearly Income	$40,000
subtract	Yearly Expenses	$30,000
add	Priority Debt	$5,000
add	Value of Nonexempt assets	$2,000
Total to be paid during the Chapter 13 Plan	$17,000
divide by	60 months to determine monthly payment	$284

Calculating a Chapter 13 plan payment is not for the faint of heart. Although it can be done by hand, most experienced consumer bankruptcy attorneys rely on computer software. This complex calculation is one reason why filing a Chapter 13 case pro se (without an attorney) can be very difficult.

Can You be Denied Chapter 13?

In the majority of cases where the court denies a chapter 13 plan, it is because a debtor did not comply with requirements outlined by your attorney or the court. In order for your chapter 13 plan to be confirmed, you must:

1) Attend the mandatory 341 hearing (also called meeting of creditors hearing)

2) Have made your first chapter 13 payment within 30 days of filing your case. In some districts, your chapter 13 payment will not be approved if you are behind on payments; therefore, it is important that you maintain your payments in your chapter 13 case to make sure your plan will be confirmed.

3) If you owe child support obligations, you must be current on your post-petition child support obligations (all child support payments due after your bankruptcy filing).

-although you may have past child support obligations paid in your chapter 13 plan, you must keep your current obligations current or you will NOT receive a discharge in chapter 13.

4) You have filed all required tax returns due within four years of filing your petition. Also, that you have provided copies of such returns to your attorney so that the trustee can be provided your most recent tax return within 7 days prior to your 341 hearing.

5) Have been honest on your chapter 13 petition and schedules regarding your assets and debts. If you are not honest then the court may find that you filed in bad faith and not approve your plan.

-At Bond & Botes, you will meet with an attorney to help ensure your petition and schedules reflect the information you provided but you must be honest with your attorney.

If you have complied with all the requirements and your Bond & Botes attorney has not mentioned any issues to you about your case, you plan should be fine.

Is Filing Chapter 13 Worth it?

The biggest benefit to filing a Chapter 13 bankruptcy is the automatic stay protection you receive when you file. During the 3-5 years that you are in an active Chapter 13 case, your creditors are forbidden from trying to collect from you in any way unless the court gives them permission. They cannot send you letters, call you, file lawsuits against you, or make any attempts to collect from you.

Can You Take a Vacation During Chapter 13

The good news for those who are newly embarking on a Chapter 13 bankruptcy repayment plan is that yes, there is oftentimes an allocation in your budget for recreation and vacation. While it will differ from state to state, your Chapter 13 trustee, will typically provide an accepted vacation and recreation budget that is based on the size of your household.

A Chapter 13 bankruptcy plan is meant to get you back on track financially and isn’t a prison sentence. The courts look at your overall financial situation and not just certain spending categories. While the goal is to pay back your creditors, there will still be room for you to spend money on your family, go on your summer vacation, and travel to your family reunion. You just have to ensure that you stick to your confirmed plan, stay current with your payments to the Chapter 13 trustee, and answer your trustee and bankruptcy attorney’s requests for tax records and financial documents.

What Is a 100% Chapter 13 Plan

Occasionally, a person may have such a high income, or own assets of such high value, that the court does not allow them to eliminate their debt and get a fresh start. But what if that person is under financial stress and needs help. That is where the 100% Plan for Chapter 13 Bankruptcy.

A 100% plan refers to a Chapter 13 bankruptcy in which you repay all of your debt under a court-supervised repayment plan. You pay back all secured debt (which is required in all Chapter 13 cases) and 100% of all unsecured debt.

Can a Bank Foreclose While in Chapter 13

If you have a home loan, your lender typically has a lien (a type of ownership interest) on your house. The lien allows the lender to sell your house at a foreclosure sale to satisfy the loan if you stop paying on your mortgage.

Once you file a Chapter 13 bankruptcy case, an order called the automatic stay is put in place that prohibits creditors from engaging in collection activities. The automatic stay prevents your lender from foreclosing on your house without obtaining court permission first.

However, if you want to keep your house while in Chapter 13, you must continue making your ongoing mortgage payments as they come due, either by making your regular payments directly to your lender outside of bankruptcy, or to the bankruptcy trustee as part of your repayment plan.

If you are behind on your mortgage before filing your Chapter 13, you can pay off the arrears through your repayment plan. After the court confirms (approves) your repayment plan, your lender can’t foreclose on your house for pre-bankruptcy mortgage arrears as long as you’re paying them off through your plan. (Learn more about how bankruptcy can help with foreclosure.)

If at any time during your Chapter 13 case, you fail to pay your monthly mortgage obligation (either inside or outside the plan), your lender can seek court permission to foreclose on your house.

When a Lender Can Foreclose

A lender who wants to move forward with foreclosure starts the process by filing a motion for relief from the automatic stay with the court. If the lender wins the motion, it will be able to begin—or resume—the process of obtaining the home, selling it at auction, and applying the proceeds to the mortgage loan.

What is The Downside to Filing Chapter 13

It can take up to five years for you to repay your debts under a Chapter 13 plan.
Debts must be paid out of your “disposable” income, which is whatever income you have left over after necessities (such as food, shelter, medical care) are paid. All of your extra cash is thus tied up during the entire repayment plan.
Bankruptcy will ruin your credit for some time to come. A Chapter 13 bankruptcy can remain on your credit report for up to 10 years.
You’ll lose all your credit cards.
Bankruptcy will make it nearly impossible to get a mortgage, if you don’t already have one.
You can’t file for Chapter 7 bankruptcy if you previously went through bankruptcy proceedings under Chapter 13 within the last six years.
Declaring bankruptcy under Chapter 13 now will make it harder to declare under Chapter 7 later.
Bankruptcy won’t relieve you of your obligations to pay alimony and/or child support.
You can’t file for Chapter 13 bankruptcy if a previous Chapter 7 or Chapter 13 case was dismissed within the past 180 days because:

You violated a court order, or
You requested the dismissal after a creditor asked for relief from the automatic stay.

You may still be obligated to pay some of your debts, such as a mortgage lien, even after bankruptcy proceedings are completed.

Can You Put Money in Savings While in Chapter 13?

If you are allowed to, saving your extra income is likely a very wise idea as your prepare to emerge from bankruptcy. You will continue to face financial challenges because of your filing, even after your bankruptcy plan in completed.

The filing will remain on your credit for at least seven years, and will probably mean you have difficulty in obtaining good rates for major loans such as a car note or mortgage. Having extra savings in this situation gives you more flexibility and allows you to avoid future financial trouble.

How Can You Fix Your Credit While in Chapter 13

Think hard on any decision involving bankruptcy, because when you commit to it, your credit score is going to take a whack. Before you commit, know that you have done all you can to climb out of your debt hole: tough, tight budgeting; taking a second job or doing freelance/gig work; selling off assets; consulting with a nonprofit debt counselor.

There are 5 primary steps for rebuilding credit during chapter 13:

Open two credit builder cards (payment history is 35% of your score)
Open one credit builder loan (credit mix is 10% of your score)
Find a friend or family member to add you to their old credit card(s)
Find a friend or family member willing to co-sign for a home, apartment, or car
Dispute the accounts for validity and accuracy

Which Is Better Chapter 11 or Chapter 13

Chapter 11 typically makes sense for businesses or individuals who have debt levels that are greater than those allowed in Chapter 13 bankruptcy. Some small business owners and individuals can take advantage of streamlined Chapter 11 procedures found under Subdivision V.

If you qualify to file for Chapter 13 bankruptcy, and you find that it will meet your needs, you’ll likely want to file it rather than a Chapter 11 bankruptcy. Some of the advantages of a Chapter 13 bankruptcy over Chapter 11 include:

Codebtor Stay in Chapter 13, But Not in Chapter 11

The protection of the automatic stay in a Chapter 13 bankruptcy extends to codebtors. So if you and another person are both liable for an account, loan, or other debt, creditors cannot pursue your codebtor for payment during your bankruptcy case. While collection can resume once your Chapter 13 case is over, this will at least give codebtors a reprieve from collection actions for three to five years. Chapter 11 does not provide the same protection to codebtors.

Hardship Discharge Available in Chapter 13

If circumstances prevent you from complying with your plan, you can request a hardship discharge. If granted, you’ll get a discharge without having to complete your plan (not all types of debts will be wiped out, however). You must meet specific criteria to qualify.

A hardship discharge is not available in Chapter 11 bankruptcy. If you cannot complete the terms of your reorganization plan, your Chapter 11 case will either be dismissed or converted to a Chapter 7 bankruptcy.

Chapter 13 Is Cheaper Than Chapter 11

Chapter 13 is usually less expensive than Chapter 11. This is because:

the filing fee for Chapter 13 is less costly, and
the Chapter 13 process requires less work.

What Is The Success Rate of Chapter 13

In Chapter 13 bankruptcy, you’re able to keep expensive property like a house or a luxury car so long as you make monthly payments under a three-to-five year repayment plan.

But unlike Chapter 7 which results in a discharge of debts in 96% of cases, only about 40% of Chapter 13 cases end in discharge. For this reason and others, filing for Chapter 13 is usually a bad idea.

Why do roughly 2 out of every 3 Chapter 13 cases fail? Well, to get a discharge of your debts, you need to complete a 3-5 year repayment plan. And most plans are 5 years long. Only at the end of the plan will the remainder of some debts be forgiven.

All kinds of unexpected expenses can occur during that 5 year plan like medical bills from getting injury, having children, having funeral expenses for family members. And your income can be reduced unexpectedly from losing your job, getting a pay cut or hour-cut.

Together, all of these life events make it very challenging to make monthly payments over a 5 year period.

As stated above, about two-thirds of Chapter 13 cases nationally result in dismissal.

When your Chapter 13 case is dismissed, you are often in a far worse financial position. That’s because the interest on your unpaid debts has continued to mount as you’ve struggled to make payments. And once you’re out of bankruptcy protection, you have more debt than ever.

Since you now have paid the costs of bankruptcy – attorney fees and filing fees, a seven year flag on your credit report — without receiving the main benefit of bankruptcy, a fresh start.

How Long Does it Take For Chapter 13 to be Approved

The Chapter 13 filing process generally takes 95 days from the filing of the petition to the approval of the repayment plan. But the bankruptcy won’t actually be discharged until the three- to five-year plan is completed.

Here’s what to expect over a typical Chapter 13 bankruptcy proceeding.

Complete credit counseling from an approved agency — within 180 days before filing.
An attorney can help with preparing the paperwork, which includes …

A list of creditors and how much is owed to each
Evidence of income
A list of property and valuables
A recent tax return
A description of your living expenses
A certificate of completion for the credit counseling course

File a bankruptcy petition, which includes $310 in fees, with the local bankruptcy court. This will put a temporary pause on any debt obligations. Foreclosure proceedings and most debt collection attempts will stop until the repayment plan is complete.
Submit a repayment plan within 14 days of filing the petition. The plan describes how lenders will be repaid.
Start following the repayment plan within 30 days after filing the bankruptcy case, even if the court hasn’t approved it yet.
The court will assign a trustee, who will review the case and meet with creditors.
The trustee will set up a creditor meeting between 21 and 50 days after you file the petition. At the meeting, you’ll answer questions under oath about your debt and proposed plan.
Attend a confirmation hearing within 45 days after the creditor meeting. At the hearing, a judge will decide on whether to approve the plan. If the plan doesn’t meet standards, you can try to modify the plan or convert the filing to a Chapter 7 bankruptcy.
Follow the repayment plan over three to five years. The trustee will collect and distribute payments throughout this time.
The bankruptcy will be discharged after the repayment plan is fulfilled and you’ve taken a debtor education course from an approved agency, and you’ve met all other requirements

What is Exempt From Chapter 13

Exemptions play a less straightforward role in a Chapter 13 bankruptcy than in a Chapter 7 bankruptcy. A debtor who files under Chapter 13 will keep their assets and develop a repayment plan to pay off their debts, so they do not need an exemption to avoid losing an asset. However, exemptions affect the monthly payments under the Chapter 13 repayment plan. This is because payments under the plan are calculated according to the value of the debtor’s non-exempt property.

Can You Get a Loan After Bankruptcy?

Following a bankruptcy, your credit scores could fall below a lender’s minimum score requirements for loan approval. And even if your credit recovers, lenders may be able to see the bankruptcy on your credit reports for up to 10 years, depending on the type of bankruptcy you filed.

If you do get approved for a personal loan after filing for bankruptcy, you may face less-than-favorable loan terms and pay relatively high-interest rates, too.

Your chances of getting approved for a personal loan might also increase the longer it’s been since you declared bankruptcy since its impact on your credit scores can diminish. You may be able to help the process along by taking out a credit-builder loan or secured credit card — both are designed to help people build or rebuild credit by allowing them to build a positive payment history.

Comparing lenders may be especially important as you look for a personal loan, and you may want to start with credit unions, community banks and online lenders. Some of these organizations may focus on smaller personal loans or low-credit borrowers.

Another option may be to ask a friend or family member with good credit to co-sign your loan. While this option can make the other person responsible for the debt and could even challenge some personal relationships, it may be one of the few ways to qualify for a decent rate or large loan amount.

Conclusion

Bankruptcy may give debtors a breather from creditors, but there is a penalty to be paid on their credit reports. Under the federal Fair Credit Reporting Act, a Chapter 13 bankruptcy will be listed on the report for seven years. Debtors in this situation may find it difficult to get additional credit for years.

Chapter 13 bankruptcy can be a useful financial tool for people with serious debts who worry about losing their homes to bankruptcy. Anyone considering this course should consult a bankruptcy lawyer.