Understanding Chapter 13 Bankruptcy

Important Features

Chapter 13 bankruptcy has the following important features:

  • Chapter 13 bankruptcy is very powerful. For instance you can use it to stop a house foreclosure, make up the missed mortgage payments and keep the house. Or you can also pay off back taxes through your Chapter 13 plan and stop interest from accruing on your tax debt.
  • Filing your papers with the bankruptcy court stops creditors in their tracks. When you file for Chapter 13 bankruptcy (or any other kind of bankruptcy), something called the automatic stay goes into effect. It immediately stops your creditors from trying to collect what you owe them. At least temporarily, creditors cannot legally grab (garnish) your wages, empty your bank account, go after your car, house or other property, or cut off your utility service or welfare benefits.
  • Some people use Chapter 13 bankruptcy to buy time. For example, if you are behind on mortgage payments and about to be foreclosed on, you can file Chapter 13 bankruptcy papers to stop collection efforts, and then attempt to sell the house before the foreclosure.
  • Chapter 13 bankruptcy requires discipline. For the entire length of your case (three to five years), you will have to live under a strict budget; the bankruptcy court will not allow you to spend money on anything it deems nonessential. You must also undergo financial counseling.
  • Payments may be deducted from your wages during your case. If you have a regular job with regular income, the bankruptcy court will probably order that the monthly payments under your Chapter 13 plan be automatically deducted from your wages and sent to the bankruptcy court.
  • The majority of debtors never complete their Chapter 13 repayment plans. Despite good intentions, although most people who file for Chapter 13 bankruptcy assume they'll complete their plan, only about 35% of all Chapter 13 debtors do. Many drop out very early in the process, without ever submitting a feasible repayment plan to the court. If you can come up with a realistic budget and stick to it, however, you should be able to complete your Chapter 13 plan.

Chapter 13 bankruptcy can stay in your credit file for up to 10 years from the day you file your papers, although rarely are Chapter 13 bankruptcies reported for more than seven years. After your case is over, however, you can take steps to improve your credit. In fact, some Chapter 13 bankruptcy courts have established programs to help you do just that. In such a program, if you have paid off around 75% or more of your debts, you may attend money management seminars and apply for credit from certain local creditors.


Chapter 13 bankruptcy has several important restrictions. Your first step is to see whether or not you are legally allowed to use the Chapter 13 process.

Businesses Can't File For Chapter 13 Bankruptcy

A business, even a sole proprietorship, cannot file for Chapter 13 bankruptcy in the name of that business. Businesses are steered toward Chapter 11 bankruptcy when they need help reorganizing their debts.

If you own a business as a sole proprietor, however, you can file for Chapter 13 bankruptcy as an individual and include the business-related debts for which you are personally liable.

There is one exception: stockbrokers and commodity brokers cannot file a Chapter 13 bankruptcy case, even if just to include personal (non-business) debts. (11 U.S.C. § 109(e).)

You Must Have Stable And Regular Income

You must have stable and regular income to be eligible for Chapter 13 bankruptcy. That doesn't mean you must earn the same amount every month. But the income must be steady — that is, likely to continue; and it must be periodic — weekly, monthly, quarterly, semi-annual, seasonal or even annual. You can use the following income to fund a Chapter 13 plan:

  • regular wages or salary
  • income from self-employment
  • wages from seasonal work
  • commissions from sales or other work
  • pension payments
  • Social Security benefits
  • disability or workers' compensation benefits
  • unemployment benefits, strike benefits and the like
  • public benefits (welfare payments)
  • child support or alimony you receive
  • royalties and rents, and
  • proceeds from selling property, especially if selling property is your primary business.

You Must Have Disposable Income

For you to qualify for Chapter 13 bankruptcy, your income must be high enough so that after you pay for your basic human needs, you are likely to have money left over to make periodic (usually monthly) payments to the bankruptcy court for three to five years. The total amount you must pay will depend on how much you owe, the type of debts you have — certain debts have to be paid in full; others don't — and your court's attitude. A few courts allow you to repay nothing on debts that legally don't have to be repaid in full, as long as you repay 100% of the others. Some courts push you to repay as close to 100% of your debts as possible. Most courts fall somewhere in between.

To determine if your disposable income is high enough to fund a Chapter 13 plan, you must create a reasonable monthly budget. If you are not proposing to repay 100% of your debts and the court, the trustee or a creditor thinks your budget is too generous — that is, it includes expenses other than necessities — your budget will be challenged.

Your Debts Must Not Be Too High

You do not qualify for Chapter 13 bankruptcy if your secured debts exceed $871,550 (be aware that this amount increases according to a set formula every three years). A debt is called "secured" if you stand to lose specific property if you don't make your payments to the creditor. Home loans and car loans are the most common examples of secured debts. But a debt might also be secured if a creditor — such as the IRS — has filed a lien (notice of claim) against your property.

In addition, for you to be eligible for Chapter 13 bankruptcy, your unsecured debts cannot exceed $290,525 (again, subject to triennial increase). An "unsecured" debt is any debt for which you haven't put up any collateral. The debt is not related to any particular property you possess, and failure to repay the debt will not entitle the creditor to repossess property. Most debts are unsecured, including bank credit card debts, medical and legal bills, student loans, back utility bills and department store charges.

Questionnaire: Items To Include In A Chapter 13 Plan

To read and printout a copy of the Questionnaire, please click the link given below.

Items to Include in a Chapter 13 Plan

You can download a free copy of Adobe Acrobat Reader at

Copyright © 2002 Nolo


This publication and the information included in it are not intended to serve as a substitute for consultation with an attorney. Specific legal issues, concerns and conditions always require the advice of appropriate legal professionals.