What is a Chapter 13 repayment plan?

A Chapter 13 repayment plan is a way for individuals with a regular income to repay their debts over a period of time, usually three to five years. The court approves the plan and creditors are ordered to accept the payments. The individual makes payments to a trustee who then distributes the funds to creditors. Under Chapter 13, individuals must pay all of their disposable income into the repayment plan. "Disposable income" is defined as what's left after paying for reasonable and necessary living expenses like food and shelter. Any money left over after paying these expenses can be used to repay creditors. The main advantage of a Chapter 13 repayment plan is that it allows individuals to keep certain assets, like their home.

How much of your debt do you pay back in Chapter 13 bankruptcy?

You typically pay back a percentage of your unsecured debt, like credit cards and medical bills, in Chapter 13 bankruptcy. In most cases, you'll pay between 25% and 100% of your total debt. The amount you repay depends on your income and expense levels, as well as the terms of your repayment plan. Your trustee will work with you to create a repayment plan that fits your budget and allows you to get ahead on your debts.

Is Chapter 13 a good idea?

Chapter 13 bankruptcy can be a good debt relief option for people who have regular income and who want to repay their debts over time. Under Chapter 13, the debtor must propose a repayment plan to the court that lasts between three and five years. The debtor's disposable income is used to repay creditors in accordance with the repayment plan - which means that if you have little or no income left after paying your regular living expenses, you may not be able to make payments under a Chapter 13 plan. If you're behind on mortgage or car loan payments, Chapter 13 can allow you to "catch up" on these payments over time, while also providing protection from foreclosure or repossession.

Is a Chapter 13 better than a Chapter 7 bankruptcy?

There isn't really a definitive answer to this question, as it depends on your specific financial situation and what you're looking for in a bankruptcy filing. Chapter 13 is designed for people who have a steady income and want to keep their property, while Chapter 7 is for people who don't have a lot of assets and want to discharge their debt. Both chapters offer certain benefits and drawbacks, so it's important to consult with an attorney about which chapter would be best for you. In general, though, Chapter 13 is usually the better option if you want to keep your property but can't afford to repay all of your debts.

How long does a Chapter 13 bankruptcy stay on your credit report?

Chapter 13 will stay on your credit report for seven years from the date of discharge. A Chapter 13 bankruptcy is also known as a "reorganization" bankruptcy. It allows people with regular income to propose a plan to repay all or part of their debts. Under this plan, you must make regular payments to a trustee, who then distributes the money to your creditors. This repayment plan lasts three to five years, and during that time you cannot declare bankruptcy again. At the end of the repayment period, any remaining debt is discharged (wiped out). A Chapter 13 bankruptcy will stay on your credit report for seven years from the date of discharge. This means that potential lenders can see that you filed for bankruptcy protection.

Does your credit score go up after Chapter 13 is removed?

There is no definitive answer to this question as every situation is unique. In most cases, your credit score may go up after Chapter 13 is removed from your credit report, in other cases, it could possibly go down. One of the most important things to remember is that a Chapter 13 bankruptcy filing will stay on your credit report for seven years. The best thing you can do for yourself to speed up your credit score going up is to make all your monthly payments on time like your car payments, and mortgage payments, and try to keep your monthly living expenses to a minimum. For more information about how a Chapter 13 bankruptcy filing may affect your credit score, please consult with a qualified credit counseling agency, credit specialist, or bankruptcy attorney. If you would like to learn more about raising your credit score, read How to raise your credit score 100 points overnight

How long does it take to rebuild credit after Chapter 13 bankruptcy?

It usually takes at least 12-24 months of diligent and responsible credit management to significantly enhance and rebuild your credit following bankruptcy. This process requires patience, as credit scores improve gradually over time.

Does my credit go back to normal after Chapter 13?

Credit scores rarely go completely back to pre-bankruptcy levels after Chapter 13 because the bankruptcy remains on your credit history for 7 years. But scores can recover significantly with time.

Should I close credit card accounts after bankruptcy?

It's generally recommended to keep old accounts open but refrain from using them. Having longer, established accounts helps your credit scores.

How many credit cards should I have after bankruptcy?

Start with one secured card, use it responsibly for 6-12 months, and then consider adding another credit card. Avoid getting too many new accounts right away.

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How Chapter 13 Works - The Bankruptcy Basics

August 29, 2022

Last Updated: March 19, 2024

Learn about chapter 13 bankruptcy

Disclaimer: We are not qualified bankruptcy professionals and are not giving advice. Always speak with a qualified professional before making any legal or financial decisions.

Facing financial turmoil can feel like navigating a storm without a compass. If you're overwhelmed by debt but wish to avoid the total wipeout of bankruptcy, Chapter 13 might be your beacon of hope.

Often referred to as the wage earner's plan, Chapter 13 bankruptcy allows individuals with a steady income to reorganize their debts, offering a path to financial recovery without losing everything.

In this guide, we'll simplify Chapter 13, providing you with the essentials to understand how it works and how it might be the lifeline you need.

Eager to skip the details and get advice from a debt professional now? Click here for a free consultation.

Chapter 13 Bankruptcy

Chapter 13 is a reorganization of debt rather than an erasure of debt. There is a limit as to how much debt you can have with Chapter 13, and it takes at least up to five years to get a discharge.

The main benefit of Chapter 13 is that it allows debtors to keep the property and catch up on non-dischargeable debt payments like mortgages and car loans.

The main benefit to Chapter 13 is that you do not lose your property and it allows you to play catch up on bills. You also do not end up with as much damage to your credit report with Chapter 13.

How does Chapter 13 Work?

Basically, your first step to a Chapter 13 bankruptcy case is complete a credit counseling course (this costs between $10 and $50). Once this is completed, you fill out all 23 required Chapter 13 bankruptcy relief forms and sign the appropriate pages, you then file a bankruptcy petition with the bankruptcy court. This costs $313, and bankruptcy filings are not waivable.

You will also create and submit a Chapter 13 repayment plan with the Chapter 13 forms.

You will be assigned a court-appointed trustee who will go over your paperwork and the bankruptcy forms to make certain you filled out both accurately.

You will then have a 341 meeting with the creditors and bankruptcy trustee.

The next step in the Chapter 13 bankruptcy process is a hearing before the bankruptcy judge who will decide if your case is valid.

If the bankruptcy court approves your petition, you then complete your Chapter 13 bankruptcy plan and make all payments on time.

Your final step before discharge is a second credit counseling class. If you have completed your debt management plan, your Chapter 13 bankruptcy is then discharged.

Read here to learn more about Bankruptcy information

Pros and Cons of Chapter 13

Pros of Chapter 13:

Keep Property

Chapter 13 permits debtors to keep assets like a home, car, or other property while repaying debts over time through a court-approved repayment plan. This can stop foreclosure or repossession.

Stop Collection Efforts

Once a Chapter 13 case is filed, creditors must cease collection efforts and contact the trustee instead. This provides relief from harassment by creditors.

Reduce Unsecured Debt

Unsecured debts like credit cards, medical bills, and personal loans can be paid back at a fraction of what is owed, often as little as 25% of the total debt. This can significantly reduce or eliminate unsecured debts.

Catch Up on Mortgage/Car Payments

Chapter 13 allows debtors to become current on missed secured debt payments like mortgages and car loans by making up the missed payments over the 3-5-year repayment period. This avoids foreclosure or repossession.

Cons of Chapter 13:

Lengthy Repayment Period

Chapter 13 plans typically last from 36-60 months. This is a long period during which all disposable income must go toward repaying debts.

Credit Damage

A Chapter 13 bankruptcy remains on your credit report for 7 years from the date of discharge, damaging credit and making loans difficult to obtain.

Secured Debts Must Be Paid

All missed payments on secured debts like mortgages and car loans must be made up over the life of the plan. The full amounts of these debts must be repaid.

Liquidation of Asset

While not required, the trustee may force the liquidation of certain assets to repay creditors. Equity in luxury items or second homes may need to be tapped.

Risk of Dismissal

If the debtor fails to make payments on time or comply with the court-ordered repayment plan, the case can be dismissed, eliminating bankruptcy protections.

Alternatives to Chapter 13 Bankruptcy

Chapter 13 bankruptcy is their best option:

Debt Management Plan

Work with a non-profit credit counseling agency to set up a debt management plan (DMP) that allows you to consolidate debts into one payment each month, often with reduced or waived interest rates and fees. A DMP helps get accounts current and pay down principal balances over 3-5 years.

Debt Settlement

A debt settlement company negotiates directly with your creditors to settle accounts for on average 40-60% less than the total amount owed. This does damage credit but lets you avoid bankruptcy.

Debt Consolidation Loan

Take out a new personal loan to pay off higher-interest credit card balances. This simplifies payments into one bill at a lower interest rate. Credit score determines loan terms.

Selling Assets

Liquidating assets like a second car, valuable collectibles, real estate, or other property can generate funds to pay off debts and avoid bankruptcy altogether.

Budgeting Assistance

Get help from a credit counseling agency or financial advisor to create a realistic budget that prioritizes debt payments and living expenses. This helps manage payments.

Debt and Chapter 13 Bankruptcy Court

As of 2021, you can file for Chapter 13 if you have less than $419,275 in unsecured debts including medical bills, personal loans, utility bills, and credit card debt.

Your secured debt (mortgage, home equity loans, and car loans) can not exceed $1,257,850 with a Chapter 13. The main difference between secured debt and unsecured debt is unsecured debts usually included credit cards, medical bills, and student loans.

Certain priority debts are not dischargeable in Chapter 13. These secured and unsecured debts include the following:

tax debt or government fees
mortgages
child support obligations or alimony
any student loan debt
any car loan

For a broader understanding of what declaring bankruptcy entails in terms of debt elimination, you might want to explore our article on whether you get out of all debts if you declare bankruptcy.

Chapter 13 and Property

Under Chapter 7, you can be required to sell most assets like property in order to repay debt. Under Chapter 13. you can keep the property but must pay up to that appraised amount to creditors.

Chapter 13 Payment Calculator

If Chapter 13 sounds like a possible option, you may want to try out a Chapter 13 Bankruptcy payment calculator. You will need to gather a lot of information before you can make an informed decision.

The easiest way to find a Chapter 13 calculator is to open up Google and search the words "chapter 13 payment calculator".

Priority Debts

If you have priority debt like child support, alimony, or tax debt, you need to pay these in full during your Chapter 13 bankruptcy repayment plans. You'll need to know the value of these debts.

Mortgage Payments

If you want to keep your home, you will have to pay off any outstanding amount (in arrears) during the repayment plan.

If you plan to surrender the home, you do not pay back the arrears.

If you have home equity loans or a HELOC, you have several options with a Chapter 13 and may be able to lien strip them. Since this can be very complicated, speak to a bankruptcy lawyer.

Car Loan and other Secured Debt

If you have non-mortgage secured debts, you generally have to pay off loans during a Chapter 13 bankruptcy. You'll need to know how much you owe and enter the values in the correct sections.

If you qualify for a "cramdown" you may end up paying the actual value of the vehicle, not the owed value. Again, you may want to speak with a specialized Chapter 13 Bankruptcy attorney.

Administrative Fees

For a Chapter 13 BK, you will generally have to pay the court-appointed trustee up to 10% of all amounts distributed to unsecured creditors.

You may also have to pay interest on secured debts that you are paying off through your debt management plan. This totals prime rate plus 1-3%.

Legal Fees

Chapter 13 is far more complicated than chapter 7 so you may want to hire a bankruptcy lawyer. The cost can be rolled into your payment plan.

Rebuilding Credit After Chapter 13

Once a Chapter 13 case has been discharged, focus on how to rebuild your credit score.

Get a Secured Credit Card

Secured cards require a cash deposit that acts as your credit limit. Responsible use demonstrates you can handle credit again.

Become an Authorized User

Ask a family member with good credit to add you as an authorized user on a credit card. Their positive history boosts your score.

Pay Bills On Time

Pay all bills, including utilities and rent, by their due dates. This responsibly shows creditors you can meet obligations.

Limit New Credit

Hold off applying for new credit until your score starts to recover. Too many new accounts can hurt scores.

Monitor Credit Reports

Review reports from Equifax, Experian, and TransUnion. Dispute any errors by submitting proof to the credit bureaus.

Consider a Credit-Builder Loan

These loans place the amount borrowed in a savings account. Small monthly payments and interest build credit history.

FAQs

What is a Chapter 13 repayment plan?

A Chapter 13 repayment plan is a way for individuals with a regular income to repay their debts over a period of time, usually three to five years. The court approves the plan and creditors are ordered to accept the payments. The individual makes payments to a trustee who then distributes the funds to creditors.

Under Chapter 13, individuals must pay all of their disposable income into the repayment plan. "Disposable income" is defined as what's left after paying for reasonable and necessary living expenses like food and shelter. Any money left over after paying these expenses can be used to repay creditors.

The main advantage of a Chapter 13 repayment plan is that it allows individuals to keep certain assets, like their home.
How much of your debt do you pay back in Chapter 13 bankruptcy?

You typically pay back a percentage of your unsecured debt, like credit cards and medical bills, in Chapter 13 bankruptcy. In most cases, you'll pay between 25% and 100% of your total debt.

The amount you repay depends on your income and expense levels, as well as the terms of your repayment plan. Your trustee will work with you to create a repayment plan that fits your budget and allows you to get ahead on your debts.
Is Chapter 13 a good idea?

Chapter 13 bankruptcy can be a good debt relief option for people who have regular income and who want to repay their debts over time. Under Chapter 13, the debtor must propose a repayment plan to the court that lasts between three and five years.

The debtor's disposable income is used to repay creditors in accordance with the repayment plan - which means that if you have little or no income left after paying your regular living expenses, you may not be able to make payments under a Chapter 13 plan.

If you're behind on mortgage or car loan payments, Chapter 13 can allow you to "catch up" on these payments over time, while also providing protection from foreclosure or repossession.
Is a Chapter 13 better than a Chapter 7 bankruptcy?

There isn't really a definitive answer to this question, as it depends on your specific financial situation and what you're looking for in a bankruptcy filing. Chapter 13 is designed for people who have a steady income and want to keep their property, while Chapter 7 is for people who don't have a lot of assets and want to discharge their debt.

Both chapters offer certain benefits and drawbacks, so it's important to consult with an attorney about which chapter would be best for you. In general, though, Chapter 13 is usually the better option if you want to keep your property but can't afford to repay all of your debts.
How long does a Chapter 13 bankruptcy stay on your credit report?

Chapter 13 will stay on your credit report for seven years from the date of discharge.

A Chapter 13 bankruptcy is also known as a "reorganization" bankruptcy. It allows people with regular income to propose a plan to repay all or part of their debts. Under this plan, you must make regular payments to a trustee, who then distributes the money to your creditors. This repayment plan lasts three to five years, and during that time you cannot declare bankruptcy again.

At the end of the repayment period, any remaining debt is discharged (wiped out). A Chapter 13 bankruptcy will stay on your credit report for seven years from the date of discharge. This means that potential lenders can see that you filed for bankruptcy protection.
Does your credit score go up after Chapter 13 is removed?

There is no definitive answer to this question as every situation is unique. In most cases, your credit score may go up after Chapter 13 is removed from your credit report, in other cases, it could possibly go down.

One of the most important things to remember is that a Chapter 13 bankruptcy filing will stay on your credit report for seven years. The best thing you can do for yourself to speed up your credit score going up is to make all your monthly payments on time like your car payments, and mortgage payments, and try to keep your monthly living expenses to a minimum.

For more information about how a Chapter 13 bankruptcy filing may affect your credit score, please consult with a qualified credit counseling agency, credit specialist, or bankruptcy attorney.

If you would like to learn more about raising your credit score, read How to raise your credit score 100 points overnight
How long does it take to rebuild credit after Chapter 13 bankruptcy?

It usually takes at least 12-24 months of diligent and responsible credit management to significantly enhance and rebuild your credit following bankruptcy. This process requires patience, as credit scores improve gradually over time.
Does my credit go back to normal after Chapter 13?

Credit scores rarely go completely back to pre-bankruptcy levels after Chapter 13 because the bankruptcy remains on your credit history for 7 years. But scores can recover significantly with time.
Should I close credit card accounts after bankruptcy?

It's generally recommended to keep old accounts open but refrain from using them. Having longer, established accounts helps your credit scores.
How many credit cards should I have after bankruptcy?

Start with one secured card, use it responsibly for 6-12 months, and then consider adding another credit card. Avoid getting too many new accounts right away.

Other Options for Bankruptcy Proceedings

There are options to bankruptcy court to obtain financial relief. Before you file a Chapter 13 bankruptcy, consider talking to the debt relief professionals at Pacific Debt Relief. We specialize in debt settlement for unsecured debt like medical bills and outstanding credit card debt.

We may be able to help you settle your consumer debt for substantially less than you owe and succeed with a debt repayment plan. We do not require a consolidation loan or any personal loans.

There are consequences to debt settlement, but settling can be a better option than bankruptcy. Our debt relief experts are standing by to help you understand all your debt relief options and if debt settlement is not right for you, can refer you to a trusted partner who can help you improve your financial situation.

Conclusion

While Chapter 13 bankruptcy can provide debt relief by allowing you to repay debts over time, it has serious downsides like lengthy repayment plans and credit damage. Thoroughly explore all alternatives first, like debt management plans, debt settlement, and budgeting assistance.

The decision to file Chapter 13 should not be taken lightly. However, if you responsibly follow through with your repayment plan and take steps to rebuild credit after discharge, financial recovery is possible.

With time and diligent money management, you can bounce back from Chapter 13 bankruptcy and work toward restoring your financial health. The process is difficult, but take it one step at a time.

If you are struggling with overwhelming debt and want to explore your debt relief options, Pacific Debt Relief offers a free consultation to assess your financial situation. Our debt specialists can provide objective guidance relevant information and support to help find the right debt relief solution.

Disclaimer: We are not offering advice on bankruptcy law. Contact a bankruptcy attorney for more information.

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