Many debtors file for Chapter 13 bankruptcy to reorganize their debts and catch up on their missed mortgage or car loan payments through an affordable repayment plan.
After paying your disposable income into your plan, you receive a bankruptcy discharge wiping out any balance remaining on qualifying debts. Most people who complete their repayment plan emerge from bankruptcy owing nothing more than a mortgage payment and possibly school loans.
In this article, you'll learn more about:
But filers can't erase everything owed in Chapter 13, and you'll want to know how to calculate your monthly Chapter 13 payment. Once you've learned about the debts you can eliminate in Chapter 13 bankruptcy, check out the resources provided at the end of the article. You'll find links to applicable bankruptcy forms and additional articles we think you'll enjoy.
While it's possible to pay 100% of your debt in bankruptcy, doing so is rare. Generally, only people with very high incomes pay all that they owe. Most people pay what they can afford each month, and the bankruptcy court wipes out whatever remains on qualifying debt at the end of the case.
Any debt that you can erase in Chapter 7, you can wipe out in Chapter 13, but Chapter 13 discharges even more obligations. You'll find both lists below.
Nonpriority unsecured debts are the easiest to eliminate in Chapter 13 bankruptcy because they receive no special treatment under the law. The following are some of the most common nonpriority general unsecured debts you can wipe out in Chapter 13 bankruptcy:
But this isn't a complete list of the debts you can erase in Chapter 13—there's more. Also, don't assume you won't pay anything toward these obligations.
Some of the most common debts you can discharge in Chapter 13 bankruptcy but not in Chapter 7 include:
The percentage of debt you'll repay in Chapter 13 depends on how much you earn and your qualifying debt amount. Nonpriority unsecured creditors share your "disposable" income or the amount remaining after you pay other monthly bills and required Chapter 13 debts. Nonpriority unsecured creditors receive anything from 0% to 100%, depending on your available income.
Example. Holly has $312 remaining each month after paying her rent, utilities, food, car payment, and other monthly expenses allowed in Chapter 13. Each month, the Chapter 13 bankruptcy trustee appointed to Holly's case will divide the $312 between her nonpriority unsecured creditors on a "pro rata" or percentage basis. Learn how bankruptcy trustees get paid.
If you expect to pay pennies on the dollar for everything you owe, you'll be surprised to learn that you must pay some things in full. For instance, you must fully pay priority debts, like back support obligations and recent tax debt.
You must also fully pay past due amounts on secured debts, like your mortgage and car loan, and continue to pay the monthly house or car payment. Otherwise, you can return the property to the lender.
So why does this rule exist? A secured creditor has a lien on property you pledged as collateral. Because a bankruptcy discharge doesn't automatically eliminate a creditor's lien from your property, secured creditors can foreclose or repossess your property if you don't pay what you owe. If you don't pay, you lose the property.
In Chapter 13 bankruptcy, you can reduce the amount owed on some secured properties if you can satisfy the requirements for:
Here's how they work.
A Chapter 13 bankruptcy cramdown lets you reduce the principal balance or interest rate on secured loans. If you qualify, you'll pay the property's actual value, assuming it's lower than you owe.
In the plan, you'd divide the debt into the secured portion—the amount equaling the property's value—and the unsecured part—the amount exceeding the property value.
You'd pay the secured portion in full through your Chapter 13 plan and the unsecured amount with other nonpriority unsecured debts. The bankruptcy court would discharge any unpaid unsecured portion at the end of your bankruptcy.
Although a cramdown can be helpful, it isn't available for your home. Also, because you must pay the entire cramdown amount through the plan, many people can't afford this Chapter 13 benefit.
If you have multiple mortgages, and your home mortgage is "underwater" or worth less than you owe, you might be able to strip off a junior mortgage. When you strip a junior lien, it's treated as a nonpriority unsecured debt in Chapter 13 bankruptcy and wiped out when you receive your discharge.
Most Chapter 13 repayment plans last three to five years. To receive a Chapter 13 bankruptcy discharge, you must complete all your required plan payments. If you stop making your payments before completing your bankruptcy, the court will typically dismiss your case without discharging your debts.
After you receive your Chapter 13 discharge, the bankruptcy court will close your case, and if you're like most, you'll enjoy being in great financial shape. Most people have a mortgage and student loans at the end of the case. You'll be completely debt-free if you don't have a mortage, student loans, or another long-term debt.
Find out more about what happens after bankruptcy.
Although Chapter 7 filers with simple cases can represent themselves, you'll want to hire a bankruptcy lawyer to help you in Chapter 13 bankruptcy. Drafting a plan the bankruptcy court will "confirm" or approve is almost impossible without a solid understanding of bankruptcy law and expensive software.
Fortunately, most filers pay less upfront attorneys' fees when filing for Chapter 13 because a bankruptcy lawyer can include the legal fees in the Chapter 13 plan payment. Because of this option, many bankruptcy lawyers charge as little as $100 to start.
Bankruptcy is essentially a qualification process. The laws provide instructions for completing a 50- to 60-page bankruptcy petition, and because the rules apply to every case, you can't skip a step. We want to help.
Below is the bankruptcy form for this topic and other resources we think you'll enjoy. For more easy-to-understand articles, go to TheBankruptcySite.
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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.