Provisions of Chapter 13 of the Federal Bankruptcy Laws

By Heather Frances J.D.

Chapter 13 bankruptcy is a form of personal bankruptcy that allows an individual’s debt to be adjusted if he has a regular income. Unlike Chapter 7 bankruptcy, a Chapter 13 proceeding allows the debtor to keep property and pay debts over time rather than liquidating assets to pay creditors. One advantage of Chapter 13 bankruptcy is the opportunity for the debtor to save his home from foreclosure and even stop a foreclosure already in progress.

Payment Plan

The debtor filing for Chapter 13 bankruptcy must provide details to the bankruptcy court revealing his income, expenses, property and debt. Then, the debtor must create a workable payment plan covering three to five years and present the plan to the court within 14 days of filing the bankruptcy petition. If the debtor’s monthly income is below the median income in his state, the plan will cover three years unless the court approves a longer plan. If the debtor’s monthly income is greater than the state median, the payment plan generally is established for five years.

Debt Priority

Debts are classified as priority, secured or unsecured. Priority debts, such as taxes and costs related to the bankruptcy proceeding, must be paid in full. Debts secured by collateral are “secured” debts, while all other debts are “unsecured.” Unsecured debts may or may not be paid in full at the end of the repayment plan. Whether an unsecured debt is paid will depend on the debtor’s disposable monthly income, the value of his nonexempt property and the length of his repayment plan.

Get a free, confidential bankruptcy evaluation. Learn More

Trustee's Role

Under Chapter 13, the debtor does not make payments directly to creditors and has no contact with creditors during the payment plan period. Instead, the debtor makes payments to a bankruptcy trustee, who then disburses the money to the creditors on the debtor's behalf. In North Carolina and Alabama, trustee duties are performed by bankruptcy administrators rather than trustees.

Automatic Stay

While the payment plan is in effect, most creditors cannot pursue collection or initiate new collection efforts. This stay is automatic and doesn’t require a judge's order. It can even protect co-debtors who have co-signed on consumer debt with the debtor who files for Chapter 13 bankruptcy. The automatic stay does not apply to certain types of actions, such as child support collections.

Counseling Requirements

Under Chapter 13, a debtor must complete credit counseling before filing a bankruptcy petition with the court, which may help the debtor create a debt repayment plan. Counseling agencies must be approved by the Department of Justice. Before the bankruptcy case concludes, the debtor must complete a course on budget counseling, called debtor education.

Hardship Discharge

If a debtor begins a repayment plan but is unable to complete it as the result of unforeseen circumstances such as a job loss or illness, he may qualify for a hardship discharge of his debt. The hardship discharge allows a debtor to stop making court-ordered payments early but still receive a discharge of unpaid debts as if the repayment plan had been completed. To qualify, the debtor’s inability to complete payments must be from circumstances beyond the debtor's control. If the repayment plan can be adjusted to address the problem, or if unsecured creditors have not received at least as much as they'd have received if the debtor had filed Chapter 7 bankruptcy, the court cannot grant a hardship discharge.

Get a free, confidential bankruptcy evaluation. Learn More
What Does a Discharge in a Chapter 13 Bankruptcy Mean to Debtors?


Related articles

Bankruptcy Laws Regarding Mortgage

Bankruptcy allows debtors to get some relief from a debt load they cannot otherwise overcome, but it doesn't always allow them to keep their assets. Mortgage lenders have rights even while the homeowner is going through bankruptcy. Depending on the type of bankruptcy a debtor files and how much equity he has in his home, he may lose his home during the bankruptcy process.

Disadvantages to Filing Chapter 13 Bankruptcy

Chapter 13 bankruptcy gives a debtor the opportunity to get back on his feet when the debt load becomes too much to handle. However, Chapter 13 bankruptcy proceedings carry potential disadvantages, such as negatively impacting the debtor's creditworthiness, so a debtor may choose to file another type of bankruptcy case or attempt to avoid bankruptcy altogether.

Schedule F Bankruptcy Discharge

Bankruptcy means a fresh start – a court order protects you from collections and lawsuits, and eventually, the court discharges (cancels) some of your debts. You must report your assets and liabilities, and you will be required to sell your non-exempt property to repay creditors (in Chapter 7) or set up a repayment schedule (in Chapter 13). As your bankruptcy case begins, you'll complete a Schedule F, and it's vital to know the difference between a secured and unsecured debt when preparing this form.

Related articles

Laws on Debt Forgiveness Through Chapter 13

When debt piles up, individual debtors may need the structure of a bankruptcy case to get back on their feet again. If ...

How to File Bankruptcy With Unsecured Debt

Many people who file for bankruptcy do so because they seek a financial clean slate and relief from a heavy debt ...

Wage Earner Plan Vs. Bankruptcy

Bankruptcy law is designed to provide a “fresh start” from debt and sets up alternative remedies defined by the ...

Rules for Declaring Bankruptcy in Kansas

When a Kansas resident wants a clean financial slate, he may file for bankruptcy protection under Chapter 7 or Chapter ...

Browse by category
Ready to Begin? GET STARTED