Written by attorney Jeffrey Williams


To file a Chapter 13 bankruptcy, sometimes called “personal reorganization" or “wage-earner bankruptcy," you must have some sort of regular income sufficient to cover your daily living expenses, not counting all your debt. Only individuals can file Chapter 13; corporations, LLCs, and partnerships cannot. A Chapter 13 case lasts for either three or five years, depending on your income.

The very day your Chapter 13 case is filed, all creditors must stop all collection efforts, by Federal law. Harassing phone calls and letters must cease. If you are being sued, the lawsuit must stop immediately. If you have already been sued successfully and have a judgment against you, the creditor must stop all collection efforts; garnishing of your wages or bank accounts must stop, and sometimes we can have money that was garnished from your pay returned to you.

If your mortgage is behind, any efforts to foreclose must stop, including up until the morning of a foreclose sale. You are allowed by the Court to catch up any overdue mortgage payments during the three or five years your bankruptcy lasts. For example, if your regular mortgage payment is $1,000 per month, and you are three payments ($3,000) behind, you can normally pay your regular mortgage payment of $1,000 plus $50 per month toward arrearages (total $1,050 per month) in a five-year plan. In addition, if your house is underwater (you owe more than it would sell for at the moment you file), any second mortgage can be declared “unsecured." It is then possible for the second mortgage lien to be “stripped" (cancelled) by filing the proper motion with the Court.

Likewise, if your car loan is overdue, any efforts at repossession must stop at once, and you normally will be allowed plenty of time to pay off the arrearages. Also, if it has been more than 910 days since you purchased the car, you can force the lender to lower the principal balance on the loan to the actual cash value of the car, so you can make smaller payments. For example, if there is still $10,000 due on the car loan, and the actual cash value of the car is now $7,000, your attorney can strip $3,000 off the balance due, leaving only $7,000 still due to be paid. This is called a “cram-down," for obvious reasons.

Chapter 13 filers do not have to surrender any of their personal possessions, and can own more than one piece of real estate. Your bankruptcy attorney prepares a “plan" for your case, which is due 15 days after the initial filing, in which you propose the terms under which you will make payments during the bankruptcy. First, your regular income is determined, Then, all daily living expenses are listed, with a reasonable allowance for all necessities, such as mortgage, car loans, gasoline, utilities, food, clothing, child support, IRS taxes not over three years old, etc.. The difference between your income and this living budget is considered your “disposable income." You pay this amount monthly to the bankruptcy Trustee appointed by the Court, either by regular deductions taken from your wages (“IDO") or by mailing a check to the Trustee who divides it up among all your remaining creditors. He or she also applies it toward your legal fees (for your attorney and for the Trustee). It may be that your monthly payment pays everybody off in five years (a “100% plan"), or it may be that you only pay off pennies on the dollar, if you have a lot of debt and very little disposable income. Either way, the creditors are forced to accept whatever size payment is available. At the conclusion of the three or five year period, all remaining past due debt is forever permanently cancelled (“discharged"). In other words, you pay what you can during the plan, then you are totally free from all dischargeable debt (except for remaining secured loans such as your mortgage) at the end of your bankruptcy.

Be sure your plan contains a reasonable budget which contains funds for major car repairs, tires, brakes, household major appliance or air conditioner failure, medical expenses, etc.; some people with plans not providing for such expenses find later that they cannot comply with the Trustee’s strict enforcement of their plan, and end up dropping out of the plan before the time period is up, or converting to a Chapter 7.

Chapter 13 bankruptcies may remain on your credit record for only seven years, although in some cases they remain for ten years; Chapter 7 bankruptcies always remain on your credit record for ten years. Creditors and bankruptcy court trustees generally prefer Chapter 13 filers to Chapter 7 filers, since they make at least partial repayment on their debt, whereas Chapter 7 filers just walk away from it.

If a person owes more than $360,475 in unsecured debt (such as credit cards), or more than $1,081,400 in secured debt (such as mortgages), they do not qualify for Chapter 13 bankruptcy, and must file Chapter 11 if they want bankruptcy protection from the courts.

Entire article ©2013 The Williams Law Office LLC

Additional resources provided by the author

Also see my article "A SIMPLE EXPLANATION OF CHAPTER 7 BANKRUPTCY ," elsewhere on this web site.

Free Q&A with lawyers in your area

Can’t find what you’re looking for?

Post a free question on our public forum.

Ask a Question

- or -

Search for lawyers by reviews and ratings.

Find a Lawyer