Chapter 13 – Details

Chapter 13 bankruptcy, sometimes called the wage earner’s plan, or reorganization bankruptcy, is quite different from Chapter 7 bankruptcy (which wipes out most of your debts). In a Chapter 13 bankruptcy, you use your income to pay some or all of what you owe to your creditors over time — anywhere from three to five years, depending on the size of your debts and income.

Chapter 13 bankruptcy isn’t for everyone. Because Chapter 13 requires you to use your income to repay some or all of your debt, you’ll have to prove to the court that you can afford to meet all of your payment obligations. If your income is irregular or too low, the court might not allow you to file for Chapter 13.

If your total debt burden is too high, you are also ineligible. Your secured debts cannot exceed $1,010,650, and your unsecured debts cannot be more than $336,900. A “secured debt” is one that gives a creditor the right to take a specific item of property (such as your house or car) if you don’t pay the debt. An “unsecured debt” (such as a credit card or medical bill) doesn’t give the creditor this right.

The Chapter 13 Process
Before you can file for bankruptcy, you must receive credit counseling from an agency approved by the United States Trustee’s office. (For a list of approved agencies for cases filed in the Eastern District of Wisconsin, click here.) These agencies are allowed to charge a fee for their services, but they must provide counseling free or at reduced rates if you cannot afford to pay. We recommend because we have found them to be the most informative, cost effective, and fastest service provider.

Once you’ve completed your counseling, the credit counseling agency will give you a certificate showing that you met the requirement. To begin your bankruptcy case, you must file this certificate with the bankruptcy court, along with a packet of forms listing what you own, earn, owe, and spend. You’ll also need to submit your federal tax return for the previous year and proof that you filed federal and state tax returns for the previous four years. In addition, you must file a Chapter 13 repayment plan showing how you will pay off your debt. And you’ll have to pay the filing fee, which is currently $274.

The Chapter 13 Repayment Plan (the “Plan”)
The Plan is the most important paper in your entire Chapter 13 bankruptcy case. It describes in detail how (and how much) you will repay each of your debts. There is no official form for the Plan; we choose the content of Plan to suit the needs of each case.

Making Payments on the Plan
You must begin making payments under your Plan within 30 days of the date you file your case with the bankruptcy court. Your payments go to a Memphis, Tennessee payment center used by the Chapter 13 Trustees (the person assigned by the court to oversee your case). Once your Plan is confirmed, the trustee will distribute the money to your creditors.

If you have a job with regular income, you may choose to have your monthly payments automatically deducted from your wages and sent directly to the trustee, however, you can also choose to mail your monthly Plan payments to the trustee yourself.

How Much You Must Pay
Your Chapter 13 plan must pay certain debts in full. These debts, which include child support and alimony, wages you owe to employees, and certain tax obligations, are called “priority debts,” because they’re considered sufficiently important to jump to the head of the bankruptcy repayment line.

In addition, your plan must include your regular payments on secured debts, such as a car loan or mortgage, as well as repayment of any arrearages on the debts (the amount by which you’ve fallen behind in your payments).

The plan must show that any disposable income you have left after making these required payments will go towards repaying your unsecured debts, such as credit card or medical bills. You don’t have to repay these debts in full (or at all, in some cases). You just have to show that you are putting any remaining income towards their repayment.

How Long Your Plan Will Last
The length of your repayment plan depends on how much you earn and how much you owe. If your average monthly income over the six months prior to the date you filed for bankruptcy is higher than the median income for your state, you’ll have to propose a five-year plan. If your income is lower than the median, you may propose a three-year plan. (Click here for median income figures by state) No matter how much you earn, your plan will end if you repay all of your debts in full, even if you have not yet reached the three- to five-year mark.

If You Can’t Make Plan Payments
If for some reason you cannot finish a Chapter 13 Plan — for example, you lose your job six months into the plan and can’t keep up the payments — the bankruptcy trustee may modify your Plan. The trustee may:

  • give you a grace period, if the problem looks temporary
  • reduce your total monthly payments, or
  • extend the repayment period.

If it’s clear that there’s no way you’ll be able to complete the Plan because of circumstances beyond your control, the court might grant you a discharge of your debts on the basis of hardship. Examples of hardship would be a sudden plant closing in a one-factory town or a debilitating illness. If the bankruptcy court won’t let you modify your Plan or give you a hardship discharge, you can:

  • convert to a Chapter 7 bankruptcy, unless you received a Chapter 7 bankruptcy discharge within the last eight years or received a Chapter 13 bankruptcy discharge in a previous Chapter 13 case filed within six years of the date of the second Chapter 13, or
  • ask the bankruptcy court to dismiss your Chapter 13 bankruptcy case. You would still owe your debts. However, any payments you made during your plan would be deducted from those debts. On the flip side, your creditors will be able to add on interest they did not charge while your Chapter 13 case was pending.

How a Chapter 13 Case Ends
Once you complete your repayment plan, all remaining debts that are eligible for discharge will be wiped out. Before you can receive a discharge, you must show the court that you are current on your child support and/or alimony obligations, and that you have completed a financial management course with an agency approved by the United States Trustee. (This requirement is separate from the mandatory credit counseling you must undergo before filing for bankruptcy.) We recommend Cricketdebt for the financial management certification as well.