Chapter 13 bankruptcy allows individuals with regular income to reorganize debt through a repayment plan. Unlike Chapter 7 liquidation, debtors keep their property while paying creditors over three to five years. For those who fail the means test, have assets to protect, or need to cure mortgage arrears, Chapter 13 provides a structured path to financial recovery.
Eligibility Requirements
Regular income is required. The income must be sufficiently stable and regular to fund plan payments. Employment income, self-employment income, pensions, and Social Security all qualify.
Debt limits restrict eligibility. Combined secured and unsecured debts must fall below statutory limits, which adjust periodically. Debtors exceeding limits must use Chapter 11.
Prior bankruptcy affects eligibility. A Chapter 7 discharge within four years or Chapter 13 discharge within two years bars a new Chapter 13 discharge.
Credit counseling is required before filing. Debtor education is required before discharge. Both must be from approved providers.
Individual debtors only may file Chapter 13. Corporations and partnerships cannot use Chapter 13 and must use Chapter 11 for reorganization.
The Chapter 13 Plan
Plan duration depends on income. Below-median debtors may propose three-year plans. Above-median debtors must propose five-year plans. Plans cannot exceed five years without court approval.
Plan payment is calculated from disposable income. Income minus allowed expenses equals disposable income. The means test expense categories apply.
Secured debt treatment varies by collateral type. Car loans can often be crammed down to vehicle value. Mortgages on primary residences cannot be modified but arrears can be cured.
Priority debts must be paid in full. Recent taxes, domestic support obligations, and administrative expenses require full payment through the plan.
Unsecured creditors receive whatever remains after secured, priority, and administrative claims. The plan must pay at least as much as creditors would receive in Chapter 7 liquidation.
Mortgage Arrears
Curing mortgage arrears is a primary reason for Chapter 13 filing. Debtors behind on house payments can catch up through the plan while maintaining current payments.
Arrears include missed payments, late fees, and certain other charges. The total arrearage is paid through the plan over its duration.
Current payments continue outside the plan. The debtor pays the regular mortgage payment directly to the lender while plan payments address arrears.
Modification of primary residence mortgages is prohibited. Unlike other secured debts, the mortgage on the debtor’s home cannot be crammed down to property value.
Underwater second mortgages may be stripped in some circumstances. If no equity supports the second mortgage, it may be treated as unsecured.
Vehicle Loans
Cramdown reduces car loan claims to vehicle value. If the debtor purchased the vehicle more than 910 days before filing, the secured claim equals current value, not loan balance.
The 910-day rule protects recent purchase financing. Vehicles purchased within 910 days cannot be crammed down. The full loan balance remains secured.
Interest rate modification to a market rate is permitted. The contract rate can be reduced to the current rate for similar loans.
Surrender is an option. Debtors who cannot afford a vehicle can surrender it. Any deficiency becomes unsecured debt.
Retain and pay outside the plan is possible in some jurisdictions. The debtor continues paying under the original contract while other debts are addressed through the plan.
Plan Confirmation
Confirmation hearing occurs after creditors receive notice and opportunity to object. The trustee reviews the plan and makes recommendations.
Good faith requirement mandates the plan be proposed honestly without intent to abuse the process. Ability to pay more than proposed may indicate bad faith.
Best interests test requires unsecured creditors receive at least what they would in Chapter 7. If Chapter 7 would pay ten percent, Chapter 13 must pay at least ten percent.
Feasibility requires showing ability to make all plan payments. Income must be sufficient to fund payments while covering living expenses.
Disposable income commitment requires above-median debtors to commit all disposable income for five years. Below-median debtors have more flexibility.
During the Plan
Trustee payments are made monthly. The debtor pays the trustee, who distributes to creditors according to the plan.
Direct payments to some creditors may be authorized. Mortgage payments often continue directly to the lender rather than through the trustee.
Plan modifications address changed circumstances. Job loss, medical emergencies, and other changes may justify modifying payments.
Incurring new debt during the plan generally requires trustee approval. Unauthorized borrowing can jeopardize the case.
Tax refunds may be required to be paid into the plan. Large refunds indicate over-withholding and available income not committed to creditors.
Discharge
Discharge occurs upon completion of all plan payments. The debtor must also complete debtor education.
Chapter 13 discharge is broader than Chapter 7. Certain debts dischargeable in Chapter 13 survive Chapter 7, including some willful and malicious injury debts.
Hardship discharge is available when circumstances prevent plan completion through no fault of the debtor. Requirements include showing best interests test is met and modification is not practicable.
Failure to complete results in dismissal. Creditors can resume collection. The automatic stay terminates.
Post-discharge financial education should continue. The fresh start is most valuable when combined with changed financial behavior.
Conversion and Dismissal
Conversion to Chapter 7 is available if the debtor qualifies. Converting allows liquidation instead of continued plan payments.
Voluntary dismissal is generally available. The debtor can choose to dismiss and deal with creditors outside bankruptcy.
Involuntary dismissal occurs for failure to make payments, failure to file required documents, or other plan violations.
Serial filing limitations restrict future bankruptcy protection. Repeat filings within specified periods reduce automatic stay duration.
For Service Members
Chapter 13 offers advantages for military personnel that align with military life realities.
Stable military income supports plan feasibility. The regular paycheck makes demonstrating ability to complete the plan straightforward.
BAH and BAS inclusion increases both income and expenses. Higher income means more disposable income but allowances also support higher housing and food expenses.
Allotment to trustee provides automatic payment. Setting up an allotment ensures consistent plan funding without relying on monthly action.
Deployment during the plan requires modification or arrangement. Plans can be modified to address reduced expenses during deployment or increased expenses for family support.
PCS moves may require trustee changes. Moving to a new jurisdiction during the plan involves administrative transfers.
Security clearance implications parallel Chapter 7. The filing itself is not disqualifying. Responsible handling of financial difficulties demonstrates character.
SCRA protections provide additional tools. Interest rate reductions on pre-service debt may reduce obligations enough to improve plan feasibility.
Career continuation through the plan provides ongoing income. Unlike civilian job loss, military employment continues absent misconduct.
A military attorney understands how to structure Chapter 13 plans accounting for military income, allotments, PCS, and deployment while minimizing career impact.
Disclaimer
This article is provided for general informational and educational purposes only. Nothing in this article constitutes legal advice, and no attorney-client relationship is formed by reading this content.
Chapter 13 bankruptcy involves complex calculations, plan requirements, and multi-year commitment. Success depends on accurate income and expense analysis and realistic plan proposals. The information presented here may not reflect current law or apply to any specific situation.
Do not rely on this article to make legal decisions. Chapter 13 requires sustained commitment over three to five years. Failure to complete the plan results in loss of bankruptcy benefits.
If you are considering Chapter 13 bankruptcy, consult with a qualified bankruptcy attorney who can evaluate your specific financial situation and explain your options.
The authors, publishers, and distributors of this content expressly disclaim any liability for actions taken or not taken based on this information. Reading this article does not create an attorney-client relationship with any person or entity.
For service members, Chapter 13 planning must account for military-specific income, potential PCS, and deployment. Seek counsel familiar with both bankruptcy and military compensation.