Chapter 13 Bankruptcy: What It Is, and How It Works 

What is Chapter 13 Bankruptcy? 

Chapter 13 bankruptcy, also known as wage earner’s bankruptcy or the wage earner’s plan, is a way for individuals with a regular income to reorganize their debts into a repayment plan, without having to sell off their belongings. The agreed debts are paid over three to five years, after which they are discharged 

Chapter 13 is an option for people who are in serious debt but don’t qualify for Chapter 7 bankruptcy, usually because they earn more than the Chapter 7 income threshold. 

How Does Bankruptcy Chapter 13 Work? 

As with Chapter 7 bankruptcy, the Chapter 13 process begins with a mandatory credit counseling course. Then, debtors send their petition, along with information about their debts, income, and assets, to the US bankruptcy court in their area.  

Once the petition is filed, the debtor works with a court-appointed trustee to develop a three-to-five-year repayment plan. The plan must ensure that creditors receive a reasonable amount of what they are owed—at least as much as they would with other types of bankruptcy. A meeting known as the 341 meeting of creditors then takes place, where creditors can ask any questions they feel necessary.  

After this, payments toward the repayment plan begin. The plan is not confirmed by the court until the creditors agree to accept it, and there may be some negotiation before the plan is accepted. If the court rejects the plan (usually after several attempts to have it corrected), any payments made will be refunded. 

The debtor continues to make the agreed payments until the repayment plan is complete. The last step is to complete a debtor’s education course, after which the process is finished and the debtor receives a bankruptcy discharge, meaning that all the debts covered by the bankruptcy are cleared. 

Who Qualifies for Chapter 13 Bankruptcy? 

Chapter 13 bankruptcy is easier to qualify for than Chapter 7, which requires the debtor to have no way of paying off their debts. To qualify for Chapter 13, you must: 

• Be an individual or sole trader 

• Have a regular income 

• Have unsecured debts of no more than $465,275 (amount changes periodically) 

• Have secured debts of no more than $1,395,875 (amount changes periodically) 

• Not have filed for Chapter 13 bankruptcy within the previous two years 

• Not have filed for Chapter 7 bankruptcy within the previous four years 

Types of Debt: Priority, Secured, and Unsecured 

There are three types of debt in Chapter 13 bankruptcy:  

• Priority debts: Most taxes, alimony, child support, criminal fines, etc.  

• Secured debts: Any debts that are backed by collateral, such as your home or vehicle. These assets can be seized by the creditor if the debt goes unpaid. 

• Unsecured debts: Any debts that are not backed by collateral, such as unsecured personal loans or credit cards. 

Under the terms of a Chapter 13 bankruptcy agreement, priory and secured debts must be paid in full. Unsecured debts do not, but a significant portion of the debt must be paid. 

How Does Chapter 13 Bankruptcy Affect Your Credit? 

Although Chapter 13 bankruptcy can be a lifeline for individuals struggling with debt, it does have a significant impact on your credit report and credit score. How much of an impact it has depends on what your credit score was to begin with. Individuals with a good credit score can expect to see a big drop, but people with a lower score might not take so much of a hit. 

Chapter 13 bankruptcy stays on your credit record for seven years and will affect your credit score throughout this time. The good news is that with a proactive approach, it’s possible to rebuild your credit and get back to financial health. 

How to Rebuild Your Credit after Chapter 13 Bankruptcy 

With some time and effort, you can increase your credit score and improve your credit report after bankruptcy. It might seem like a long road, but it’s worth it.  

• Pay all bills on time: Pay rent, utilities, and any other debts on time, every time. Past-due debts can lower your credit score, while paying promptly can increase it over time. Set up automatic payments or reminders to avoid late payments.
• Be cautious with new debt: Every hard inquiry can slightly lower your score, so only apply for new credit when you need to. Avoid payday loans and high-interest credit offers as they can have unfavorable terms and be extremely difficult to repay. If you do take on new debt, such as a credit card, make repayments regularly. 
• Keep your credit utilization low: Try to keep credit card balances below 30% of the limit (ideally under 10%). Pay off your balance in full whenever possible. Lower credit utilization has a positive impact on your credit score. 
• Build an emergency fund: Having savings helps you avoid needing to use credit in emergencies. Even an emergency fund of $500–$1000 will give you an important buffer and help you avoid getting into more debt. 
• Be patient and persistent: Rebuilding credit takes time. Good financial habits will gradually improve your score, but it might take a while to see results. Within a couple of years, you may see your credit score improving and your financial options opening up. 

How to File for Chapter 13 Bankruptcy 

Chapter 13 bankruptcy is a way to pay off a significant portion of your debt over a set period, have the rest discharged, and move on with your life debt-free. It’s important to think carefully about whether it’s the right solution for you as it affects your credit report for seven years. Consulting a financial advisor or bankruptcy attorney is crucial to ensure you make the right choice. 

Filing for Chapter 13 Bankruptcy: Step-by-Step 

Once you decide that Chapter 13 bankruptcy is the right path for you, the process goes like this: 

Step 1: Take a credit counseling course 

You must complete a court-approved credit counseling course no more than 180 days (about 6 months) before filing, and receive a certificate of completion. 

Step 2: Gather your documents 

To file for Chapter 13, you’ll need to provide: 

• Proof of income (pay stubs, tax returns for the past 2-4 years) 

• Bank statements 

• A full list of debts and debtors (credit card balances, loans, etc.) 

• List of assets (house, car, investments, etc.) 

• Monthly living expenses 

• Most recent mortgage statement (if applicable) 

• Most recent car loan statement (if applicable) 

Have these documents ready before you file your petition to ensure the process goes as smoothly as possible. You’ll also need this information to make your proposed repayment plan. 

Step 3: Draw up your repayment plan 

Make a detailed plan outlining what you owe and to whom, your income and disposable income, how much you propose to pay to your creditors overall and over how long. Consult a bankruptcy attorney when making your plan—they’ll make sure that the plan is realistic, feasible, and fair, raising the likelihood of it being accepted by the court. 

Step 4: Complete the forms and file the petition 

There are several forms to fill out for filing, the key one being the Chapter 13 Petition (form 101). You’ll also have to fill out forms detailing your assets, debts, income, and expenses. These forms are all available on the US government website. The $313 filing fee must be paid at this point for the process to continue.  

Once the paperwork is filed, an “automatic stay” will be applied to your case which means that your creditors must stop trying to collect money from you until the repayment plan is in place. 

Step 5: Attend the 341 meeting of creditors  

A meeting will be held within 40 days of filing with you, the bankruptcy trustee, and representatives of any creditors who wish to attend. You’ll be required to confirm your identity under oath, and you may have to provide extra information. Creditors are also able to ask any questions they think necessary. 

Step 6: Begin making repayments 

You'll begin making repayments the month after you file, regardless of whether your repayment plan has been approved. Payments go to the trustee, who then passes them on to your creditors. If the repayment plan is rejected, any payments made will be refunded except for car payments, which will be credited to your account. If you miss payments, the trustee can request to have your case dismissed. 

Step 7: Get your plan approved 

A confirmation hearing will be held within 40 days of the 341 meeting, where your repayment plan will be approved or rejected. Debtors are usually given the chance to refine and make several changes to their plans before they are rejected. If the plan complies with the law, has been made in good faith (is not trying to cheat or defraud), and is workable, the judge will approve it. 

Step 8: Take a debtor education course 

Toward the end of the repayment schedule, you must take a government-approved debtor education course and submit a certificate of completion to the court. 

Step 9: Receive your discharge 

Once you’ve made all the agreed payments, the court will discharge the remaining unsecured debts, and you exit bankruptcy. 

How Much Does It Cost to File Chapter 13 Bankruptcy? 

The main costs involved with Chapter 13 are the filing fee, the trustee fee, and your attorney fees.  

The filing fee for Chapter 13 bankruptcy is $313, which you pay directly to the court when you file your bankruptcy papers. It's important to be ready to pay this fee right away because the bankruptcy process can’t begin without it. As well as this, the debtor must pay a fee to the bankruptcy trustee. This can be up to 10% of the agreed repayment total and is part of the monthly payment. 

Attorney fees vary depending on how complex your case is and where you're filing. Generally, you can expect to pay between $1,500 and $6,000 for a Chapter 13 case. This covers preparing and filing your papers, representing you in meetings with creditors, and managing the payment plan. 

Chapter 13 Bankruptcy Repayment Plan: Example 

It’s important to get help from a bankruptcy attorney when drawing up a repayment plan to make sure that it is realistic and covers all possible angles. Every person’s plan will look different, and it’s not possible to provide a template that will work for everyone. That said, here’s an example of how a typical repayment plan might look. 

Case Summary

• Filer: John Doe 

• Income: $4,500/month after taxes 

• Disposable Income: $1,200/month after living expenses 

• Total Debt: $75,000 

• Secured Debt: $25,000 (car loan) 

• Unsecured Debt: $40,000 (credit cards, medical bills, personal loans) 

• Priority Debt: $10,000 (past-due taxes) 

• Plan Duration: 5 years (60 months) 

In this case, John must plan to pay his priority and secured debts in full, while also paying toward his unsecured debts.  

Repayment Plan Breakdown

1. Priority debt (to be paid in full) 
   John owes $10,000 in past-due IRS taxes, which must be repaid in full over the five-year period. To meet this requirement, he will pay $167 per month toward his tax debt, ensuring it is fully paid off by the end of the plan. 

2. Secured debt (car loan) 
   John’s car loan balance is $25,000 with an interest rate of 5%. Under the repayment plan, he will make monthly payments of $471 over the 60-month period, which will fully satisfy the loan, including interest. By the end of the plan, he will have paid a total of $28,260 for his car. 

3. Trustee fees 
   As part of the Chapter 13 process, John must pay a bankruptcy trustee fee, which is typically 10% of his monthly payment. This amounts to $120 per month, totaling $7,200 over five years. 

4. Unsecured debt (credit cards, medical bills, personal loan) 
   Since priority and secured debts must be paid first, the remaining funds go toward unsecured creditors. After covering other obligations, John has $442 per month left for unsecured debts. Over 60 months, this adds up to $26,520, which will be distributed among his unsecured creditors. Since his total unsecured debt is $40,000, he will repay approximately 66% of what he owes, and the remaining balance will be discharged at the end of the plan. 

• Credit card debt ($25,000): John will pay $277 per month, totaling $16,620 over five years. 

• Medical bills ($10,000): He will pay $111 per month, totaling $6,660 over five years. 

• Personal loan ($5,000): He will pay $54 per month, totaling $3,240 over five years. 

Total monthly payment: $1,200 

Each month, John will make a payment of $1,200 to the bankruptcy trustee, who will distribute the funds according to the plan. 

Outcome at the end of five years: 

• The priority tax debt is fully paid. 

• The car loan is fully paid. 

• Unsecured creditors receive about 66% of what was owed. 

• The remaining balance of unsecured debt is discharged. 

Is Chapter 13 Bankruptcy Worth It? Weighing the Pros and Cons 

In the right situation, Chapter 13 bankruptcy can be a valuable way to regain control of your finances. It does have some potential downsides though, so it’s important to consider all your options. 

Pros	Cons
Lets you reorganize debts and repay them over time, making payments more manageable.	The repayment plan lasts for several years, requiring strict budgeting and financial discipline.
You keep your home, car, and other assets while catching up on missed payments.	Certain debts, like student loans, child support, and most taxes, cannot be eliminated but must be paid in full.
The automatic stay prevents creditors from foreclosing on your home, repossessing property, or pursuing collection actions.	It stays on your credit report for up to seven years, making it harder to get loans or credit in the short term.
Some secured debts, like car loans, may be restructured with lower interest rates or reduced balances.	You must repay a portion of all debts, which can be more expensive than liquidating assets under Chapter 7.

Chapter 13 vs. Chapter 7 

Chapter 7, or liquidation bankruptcy, is used when an individual has little chance of being able to pay their debts. It wipes out most unsecured debts (like credit cards and medical bills) but cannot be used to discharge certain types of debt such as child support, alimony, or mortgage payments. Non-exempt assets are sold, or liquidated, to make payments. Chapter 7 is faster than Chapter 13, taking around three to six months.  

Chapter 13 bankruptcy allows individuals to keep their assets while reorganizing debts into a three-to-five-year repayment plan. It’s best for those with a steady income who want to catch up on missed payments and protect their property from foreclosure. Chapter 13 takes longer than Chapter 7 and requires significant financial discipline. 

Chapter 13 vs. Chapter 11 

Chapter 13 and Chapter 11 bankruptcy both involve debt reorganization, but they serve different types of filers. Chapter 13 is designed for individuals with regular income who need to restructure debts into a repayment plan while keeping their assets. It’s simpler, faster, and less expensive than Chapter 11 but has debt limits.  

Chapter 11, on the other hand, is primarily for businesses and high-debt individuals. It allows businesses to continue operations while negotiating repayment terms and offers more flexibility in restructuring. However, it also involves complex legal proceedings and is expensive and time-consuming.  

Consider Other Debt-Relief Options Before Bankruptcy 

There are several debt management options to explore before bankruptcy. A credit counselor or financial advisor will help you to assess your situation and decide on a path forward. 

Debt Management Plan (DMP) 

A structured repayment program made through a credit counseling agency. The debt management plan helps reduce interest rates and combine payments without taking out a new loan. This option may suit individuals with a steady income who are struggling with unsecured debts but can afford regular payments. 

Debt Consolidation 

Multiple debts are combined into a single loan or credit line, often with a lower interest rate, to simplify payments and reduce overall costs. Debt consolidation (link) could be a viable choice for those with good credit who can qualify for a lower-interest loan or balance transfer, to simplify payments and reduce overall interest costs. 

Debt Settlement 

Debt settlement is when a debtor works with creditors or a settlement company to negotiate and pay a lump sum that is less than the total amount owed. It may be suitable for individuals who are significantly behind on payments, facing financial hardship, and willing to take a credit score hit in exchange for reducing their total debt burden.