How Chapter 13 works: the three-to-five-year plan

The basic deal

You propose a plan: one monthly payment, for three to five years, to a court-appointed trustee who distributes it to your creditors according to rules that decide who gets paid what. While the plan runs, the automatic stay protects you: no garnishments, no foreclosure sales, no repossessions, no collection calls. You keep all of your property, including things a Chapter 7 trustee might have taken. Finish the plan and the court discharges the unsecured debt that remains.

The myth to clear up first

You do not have to repay all your debt in Chapter 13. Some plans pay unsecured creditors in full, but those are the exception. Your payment is set by what you can afford (your income minus reasonable living expenses) and by a handful of floors the law sets, like paying at least as much as creditors would have received in a Chapter 7. For many filers, credit cards and medical bills receive cents on the dollar through the plan, and the rest is discharged at the end.

Who can file

Chapter 13 is for individuals with regular income, and “regular income” is read generously: wages, self-employment, Social Security, disability, pensions, even steady contributions from a family member. There are debt ceilings (currently about $526,700 in unsecured debt and $1,580,125 in secured debt, figures that adjust every three years); most consumers are nowhere near them.

Why choose the slower chapter

People file Chapter 13 for two kinds of reasons. Sometimes Chapter 7 isn’t available: income above the means test limits, or a Chapter 7 discharge received within the past eight years. But often Chapter 13 is simply the better tool, because the plan can do things Chapter 7 can’t:

• Stop a foreclosure and cure the arrears over years instead of all at once
• Restructure a car loan, sometimes paying the car’s value instead of the balance, at a reasonable interest rate
• Protect property that isn’t exempt: instead of losing it, you pay its value through the plan and keep it
• Pay nondischargeable taxes on a schedule, generally without new penalties accruing
• Discharge a few debts Chapter 7 can’t, including certain divorce property-settlement obligations

The shape of a case

Filing looks like Chapter 7 (petition, schedules, a $313 filing fee) plus the plan itself. Your first plan payment is due about 30 days after filing, before the plan is even approved. Around a month in, you attend the same brief meeting of creditors every bankruptcy has. Then comes confirmation: the trustee and creditors can object, terms get negotiated, and it commonly takes a few months and a revised plan or two before the judge approves it. Once confirmed, the plan binds everyone, you and the creditors alike. From there, the job is simple to describe and long to do: make the payments. There’s a light at the end of the tunnel, and the light is the discharge.

The honest drawback

Three to five years is a long time, and life doesn’t pause for it. Jobs are lost, cars get wrecked, marriages change. A meaningful share of Chapter 13 plans don’t make it to the end. That isn’t a reason to avoid the chapter; it’s a reason to know that the plan can bend: payments can be modified, cases can convert to Chapter 7, and hardship discharges exist. What happens when a plan goes sideways is covered in What happens if I can’t finish my Chapter 13 plan?.

The bottom line

If your problem is mainly “too much unsecured debt,” Chapter 7 is usually the first thing to consider. If your problem includes saving a house, keeping a car, taxes, or protecting things you’d lose in Chapter 7, Chapter 13 is often the most powerful tool in the entire Bankruptcy Code for a normal person. The Checkup asks the questions that point one way or the other.