What Is Chapter 13 Bankruptcy?

If you’re staring at a pile of bills as big as Mount Everest, dodging calls from debt collector after debt collector, and constantly feeling like there’s no way out, you may have considered bankruptcy as the next right step—maybe even your only step.

We get it. When your money problems are giving you panic attacks and you’re losing sleep, it’s time to find some help. But bankruptcy isn’t the real help you’re looking for—not even Chapter 13 Bankruptcy.

Chapter 13 Bankruptcy is often recommended for people who have assets they don’t want to lose. You still pay off your looming debts . . . just without all the pressure. Some debts might be discharged, but you’ll make payments to a trustee who will make payments to your creditors on your behalf.

But trust us: There’s a better way to get out of debt and start over (without going through the hassle of filing for bankruptcy).

What Is Chapter 13 Bankruptcy?

Chapter 13 Bankruptcy is a type of bankruptcy that allows people with a regular stream of income (aka steady money coming in) to make payments toward their debts—without the constant hounding from those tireless debt collectors.

You may think declaring bankruptcy would wipe your debts away and give you the fresh start you’re so desperate for. But instead of a clean slate, Chapter 13 Bankruptcy works like a debt management plan that tanks your credit score and is, quite honestly, a long and painful experience.  

Under Chapter 13, you essentially give your creditors a legal “IOU” note, promising to make small payments over a three- to five-year period. You get to keep your property while catching up on all those missed payments, but this isn’t the debt freedom you’re hoping for.

Who Is Eligible for Chapter 13 Bankruptcy?

If you’ve got a hefty amount of personal debt in your name, you’re probably eligible for Chapter 13 Bankruptcy. But there’s a few other things that must be true in order for you to be approved:

• You have less than $2.75 million in secured and unsecured debt combined.¹
• You’re filing for yourself (not for your business, unless you’re a sole proprietor).
• At least 180 days have passed since your last bankruptcy trial was thrown out or dismissed.
• You haven’t filed for Chapter 13 Bankruptcy in the last two years.
• You haven’t filed for Chapter 7 Bankruptcy in the last four years.
• You have a regular income. (If you’re married and don’t work, your spouse’s income counts.)
• You’ve paid your federal and state taxes for the past four years (and have proof).

What’s the Difference Between Chapter 13 Bankruptcy and Chapter 7 Bankruptcy?

Turns out, Chapter 7 Bankruptcy and Chapter 13 Bankruptcy are as different as comparing apples to oranges. Yeah, they’re both fruit, and in this case they both promise to make your money problems disappear, but in reality, that’s not quite how it works. Here’s where they’re different:

Chapter 13 Bankruptcy is for people with overwhelming personal debt who need to press the pause button on the endless calls, letters, emails and texts from their creditors—without worrying about losing their home, car or other personal property. When you file a Chapter 13 Bankruptcy petition, your creditors have to stop collecting on your debts while you work on a plan to repay them over three to five years. Chapter 13 stays on your credit for up to seven years.

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Chapter 7 Bankruptcy is a little different. It’s for business owners and individuals making less than the median income who want to press the reset button on their upside-down finances. Maybe your business hasn’t been profitable for a few years and your debts have grown to an amount that feels impossible to pay back. But there’s no easy button! With this type of bankruptcy, everything you own can be sold to help cover your outstanding debts—which means you could lose your home, car or anything else of value. When you file for Chapter 7, your credit will take a beating and the bankruptcy will stay on your credit report for up to 10 years.

What Is the Chapter 13 Bankruptcy Process?

Listen, the filing process for Chapter 13 Bankruptcy isn’t for the faint of heart. In order to be approved, you’ve got to jump through quite a few hoops. But before you even consider filing, you have to complete mandatory credit counseling from a government-approved agency. Then you can begin the filing process.

1. Get organized.

The court system will go through every single detail of your financial life. So, you’ll want all your ducks in a row before you move on to the next step in the process. Here’s what you’ll need:

• A list of all your debts with proof (credit report, bills, statements and other financial records)
• A list of your streams of income (two years of tax returns, six months of pay stubs, investment and retirement account statements, six months of bank account statements, and any other proof that you’re owed money)
• A list of your assets (real estate, mortgage statements, vehicle registration and even receipts from any big purchases you’ve made recently)
• A record of communication with your creditors, lawsuits and even insurance policies

2. Take a mandatory credit counseling class.

The courts require anyone looking to file for bankruptcy to go through credit counseling first. Essentially, it’s their last-ditch effort to try saving your finances before you file.

This is a one-time class that lasts about an hour. But you can’t just take a credit counseling course from any old Joe Shmoe either. It has to be approved by the US Trustee Program and completed at least 180 days before you file.²

Once you complete the class, you’ll get a certificate (and maybe even a debt repayment plan) to show the courts as proof. Usually, credit counseling costs about $50, but if you can’t afford to pay, contact the counseling agency before your class and they’ll give you a fee waiver.

3. Start filling out paperwork.

The filing process is a lengthy one and involves a lot of paperwork. And we mean a lot. And depending on which state you live in, there could be even more.

The US Courts website has a list of every bankruptcy form you could ever need. Just be sure to fill out the forms that are specific to Chapter 13 or “individual debtors.” You can also search for form packages on your state government’s website.

4. Find a lawyer.

There’s no rule that says you have to have a lawyer to file for bankruptcy. In fact, you might decide you don’t need one (also called filing pro se). But in many cases, hiring an attorney might be the best way to go—especially if you’re not sure of the process. A bankruptcy lawyer can help you navigate the court system, paperwork and documents, and even work with the judge to get your case approved.

5. Save your filing fee.

Bankruptcy isn’t just hard on your ego—it’s also hard on your wallet. In order to file, you must hand over a $235 case filing fee along with a $75 admin fee (for a total of $310).³ If you can’t pay it in full when you file, you can request to split it up into four payments. But you have to be paid in full 120 days after filing unless you ask for another extension.⁴ In that case, you must finish paying no later than 180 days after filing.⁵

6. File your petition.

Now it’s time to turn in all that paperwork.

But don’t forget . . . You’ll need to include:

• A list of your creditors (with the amount you owe and what it’s for)
• Information about your income (who pays you, how often and how much)
• A list of all your property and assets
• And a list of your living expenses

When you file, the court will appoint someone (called a trustee) to oversee your case.

Now that you’ve filed, your trustee will contact all of your creditors and let them know you’re going through bankruptcy. This notification lets your creditors know they can’t contact you or try to collect payment while the case is live.

7. Join the meeting of creditors.

Sounds pretty mysterious, right? In this meeting, the trustee will place you under oath (I solemnly swear . . . ). Then your creditors and trustee have the opportunity to grill you about your financial situation and your plan to repay the debts over a period of time. This meeting typically happens 21­–50 days after you file your petition.⁶

8. File your repayment plan with the court.

Like we said earlier, Chapter 13 Bankruptcy doesn’t wipe away your debts. Instead, it presses pause for a period of time while you work to pay them back. You can file your repayment plan with your bankruptcy petition, or you can file it up to two weeks after you file your petition.

With a repayment plan, you’ll make payments to your trustee for the agreed upon amounts. Then your trustee will pay your creditors over a span of three to five years.

9. Head to your bankruptcy hearing.

About a month and a half (45 days) after the meeting of creditors, you’ll have your bankruptcy hearing. A judge will either approve your plan or throw the case out. If your case gets thrown out (for example, if you didn’t show up or didn’t complete all the paperwork), the trustee will return any payments you’ve made that haven’t been dispersed to creditors, minus any fees that need to be paid.⁷

If your case is approved, you’ll start making payments to your trustee and working toward your Chapter 13 Bankruptcy repayment plan.

What Are the Consequences of Filing for Chapter 13 Bankruptcy?

Like we said earlier, bankruptcy shouldn’t be your first choice when it comes to debt management. Not only do you have to deal with the headache of paperwork, but you also have to deal with costly lawyers and the court system. Those aren’t the only consequences of filing for Chapter 13 Bankruptcy though:

• Your bankruptcy stays on your credit report for up to 10 years.
• Filing bankruptcy doesn’t affect certain financial commitments like student loans, alimony or child support.
• Bankruptcy makes it really hard to get a mortgage (if you don’t have one already).

Filing for bankruptcy isn’t easy. And dealing with the aftermath of filing isn’t any easier. But don’t worry—there are way better ways to deal with your debt than bankruptcy.

What Are Alternatives to Chapter 13 Bankruptcy?

The process to file bankruptcy (no matter what kind it is) is long, stressful and costly. When you’re struggling to keep food in the fridge and bills at bay, you might think Chapter 13 Bankruptcy is your only option—but it’s not.

Listen, Chapter 13 Bankruptcy is just another debt management tactic. But instead of providing complete relief, it brings years of headache and financial setback. It should be used as a last resort only.

Please hear this: There is hope on the other side of all the financial stress you’re feeling. There is hope when creditors are calling and letters are piling up on the kitchen table. You are not hopeless.

Here’s the truth: There are other ways to get out of debt (even the deepest end of debt) and come out on the other side—without filing for bankruptcy or worrying about your credit score. Not only will these bankruptcy alternatives give you relief from the endless piles of bills, but they’ll also give you your life back:

1. Get on a budget.

A budget should be your first line of defense in any financial crisis. It helps you see where your money is going every month and set limits on your spending. We suggest using a zero-based budget. Not because you’ll have zero in your bank account, but because you’ll be telling every single dollar of income where to go. This kind of budget will help you cut spending, save more, and work toward paying off those debts.

2. Use the pro rata method.

Pro rata is just a fancy term that means “in proportion.” This method is focused on giving your creditors their fair share of your disposable income. First, you focus on taking care of your Four Walls. Then, you divide up whatever is left and send it to your creditors. This is similar to what the courts would have you do with a bankruptcy plan . . . only it keeps you in the driver’s seat instead of a trustee.  

3. Increase your income.

One of the best ways to turn your finances around is to increase your income however you can. Get a second job, start a side hustle, or find a full-time job that can pay you more than what you’re currently making. This will add to your disposable income, so you can send more money to your creditors.

4. Learn how to get out (and stay out) of debt with Financial Peace University (FPU).

FPU is a nine-lesson course that teaches you how to get out of debt using the debt snowball method, save for emergencies, and prepare for a rock-solid financial future. Yup—that means no more debt collectors. No more worrying about how to pay your bills. No more debt. Period.