Chapter 13 bankruptcy is a type of personal bankruptcy relief that allows individuals to reorganize their debts to repay them over time. The basic process involves filing a petition with the Bankruptcy Court and negotiating a repayment plan with creditors to repay what you can afford and have some money left over for future expenses, like retirement or post-secondary school tuition payments.

Chapter 13 bankruptcy will, however, stop your ability to borrow money for seven years from the date of filing (6 years for business debtors who file under Chapter 11). The more common option and the most widely used type of personal bankruptcy relief are Chapter 7 bankruptcies. That is where a judge will liquidate your assets and use the funds to repay your creditors. This type of bankruptcy relief is known as “liquidation bankruptcy.”

Which Chapter 13 Bankruptcy Should You File?

You can file a Chapter 7 or 13 bankruptcy petition, depending on the circumstances of your case. As long as you have sufficient income and can afford to pay back some portion of what you owe, Chapter 13 may be right for you, especially if some or all of your debts are the result of medical costs and include debt incurred before the Bankruptcy Abuse Prevention and Consumer Protection Act was enforced. You can also convert a previous chapter 7 bankruptcy into a chapter 13 bankruptcy, but not the other way around.

Chapter 13 ensures a fair distribution of resources to your creditors even if you can only afford partial payments. Chapter 13 allows you to keep your property while creating a repayment plan with your creditors. If you didn’t repay all debts in full, this type of bankruptcy relief would be the better option by far.

How Does Chapter 13 Work?

The chapter 13 process has several steps that occur in the following order:

Filing Bankruptcy Petition – The debtor files a petition with the court and serves it on your creditors. This initiates the bankruptcy process and will trigger an automatic stay (see below) that stops all creditor collection efforts against you at once.

Meeting of Creditors

The debtor is expected to attend a meeting of creditors with the bankruptcy trustee within 30 days of filing. At this meeting, you will be asked questions about your finances and debts and might have to produce financial statements like income tax filings and bank statements. If your case is dismissed at this point because you failed to go to the meeting or lacked sufficient income to afford the payments under a chapter 7 bankruptcy plan, it may not be possible to file another petition under chapter 13.

Disclosure of Financial Affairs

During this step, you must provide information about your income sources, monthly living expenses, and property holdings above $500. If you have equity in your home, you must also disclose whether you own it free and clear of any liens or mortgages.

Determining the Allowable Income

During this step, the court will determine your income, including debts like child support, student loans, and other side-income (such as a part-time job). If your income is too high, the bankruptcy can be dismissed because you would not be able to afford the payments and would likely end up with more debt than you had before filing.

Making Sales & Assignments

The bankruptcy trustee will sell off any assets that are not exempt (see below). You will be assigned a percentage of the sales proceeds based on your property value.

Repaying Creditors

As you repay creditors, you will pay cents on the dollar back to them. There is no minimum requirement for chapter 13 repayment plan amounts, and even if you cannot pay what you owe in full, most creditors would accept a partial payment as long as they are paid at least what they are owed. The court will assess how much money can be spared each month to reduce your overall debt and how much can be allocated for future expenses such as college tuition or retirement savings. The court also determines what portion of your income is exempt from discharge to allow flexibility to do better in the future.