Chapter 13 Reorganization Bankruptcy

The two main types of bankruptcy for individual debtors are Chapter 7 and Chapter 13. With a Chapter 7 bankruptcy, often referred to as a liquidation bankruptcy, the court discharges the filer’s debts and gives them a fresh start.

Chapter 13 bankruptcy is classified as a reorganization bankruptcy. It’s for people who have assets and want to keep them. Rather than dismissing the debtor’s debts, the bankruptcy judge in a Chapter 13 allows the debtor to reorganize their debt and settle into a payment plan.

This article will explain  how a Chapter 13 bankruptcy works, including the eligibility requirements and the role of the Chapter 13 bankruptcy trustee.

If you’re considering filing a Chapter 13 bankruptcy petition, consider meeting with an experienced bankruptcy attorney. They’ll explain the bankruptcy basics and help you decide if Chapter 13 is your best option. They’ll also help you create a repayment plan and deal with any objections from your secured and unsecured creditors.

Eligibility for Chapter 13 Reorganization Bankruptcy

Before filing for Chapter 13 bankruptcy, you must be able to show that you meet the eligibility requirements. With a Chapter 7 bankruptcy case, the filer must only show that they pass the means test. This test requires that they show their monthly income is less than their state’s median income.

Chapter 13 bankruptcy is different. Unlike Chapter 7 bankruptcy, Chapter 13 requires that you have sufficient regular income to make monthly payments to your creditors through a payment plan. If the trustee or bankruptcy judge doesn’t believe you can afford to make payments under your Chapter 13 plan, they may dismiss your case or suggest that you file for Chapter 7 instead.

Specific Limitations for People Filing Chapter 13 Bankruptcy

In addition to the above legal requirements, there are other specific criteria you must meet to qualify for Chapter 13. For example, the U.S. Bankruptcy Courts impose debt limits for those people considering Chapter 13 bankruptcy.

Effective from April 2025 until March 2028, you cannot file Chapter 13 if you owe more than $1,580,125 in secured debt or $526,700 in unsecured debt. If your total debt exceeds these limits, you may have to consider filing Chapter 7 bankruptcy instead.

Unsecured debts are accounts you have that are not collateralized by property. The most common types of unsecured debt are credit cards, medical bills, and personal loans. Secured debts, on the other hand, are accounts that are attached to an asset. For instance, mortgages and car loans are secured debts.

When you submit your bankruptcy petition, you must include a list of your debts and assets. The bankruptcy courts refer to these forms as “schedules.” The Chapter 13 trustee will review this information to confirm that you meet the eligibility requirements. If you don’t, the trustee will object to your petition. You can either modify and resubmit it, or file a Chapter 7bankruptcy case instead.

Chapter 13 Reorganization Process

Before filing for bankruptcy, you must complete credit counseling and a debtor education course from an agency approved by the United States Trustee’s office. Unless you qualify for a fee waiver, you must pay for these courses.

Once you complete the class, you will receive a certificate of completion. You must submit a copy of this certificate with your bankruptcy petition, along with the other bankruptcy forms and the filing fee of $313.

When you file your papers with the U.S. Bankruptcy Court, you must provide the following information:

• Copies of your most recent federal tax returns
• Schedules of your debts, assets, and creditors
• Proof of your Social Security number (for the 341 Meeting of Creditors)
• Proof of income (paystubs for the past 60 days)
• Employment information
• Exemptions you wish to claim
• Co-signer information
• Whether your property is in foreclosure/repossession
• Proposed reorganization plan

The trustee will review your information and confirm that you qualify for Chapter 13 bankruptcy. They will communicate your proposed repayment plan to the creditors, and they’ll have a chance to object to your Chapter 13 plan. If the court accepts a creditor’s objection, it will either dismiss your case or give you the chance to change your payment plan.

You will begin making monthly payments to the trustee handling your case within 30 days of filing your plan. In turn, the trustee will send your creditors their portion of the money

Repayment Plans for Chapter 13 Reorganization Bankruptcy

Creating your Chapter 13 bankruptcy plan is perhaps the trickiest part of the filing process, but it’s also one of the most important. Your plan will describe, in detail, how much you intend to pay each creditor during the bankruptcy.

While there are no formal requirements for how you present this information, most local bankruptcy courts have special rules you must follow. A bankruptcy attorney familiar with the court rules will ensure you use the proper format.

How Much Do You Need To Pay?

Under your Chapter 13 repayment plan, you must include a plan to pay certain debts in full. These debts, called”priority debts,”are more important than other debts and jump to the front of the line in your bankruptcy repayment plan. Priority debts include recent tax debts and past-due child support.

Your repayment plan must account for other debts as well. Money you owe to secured creditors, such as mortgage payments and car loans, must be part of your Chapter 13 plan. If you’re behind on any secured debts, you must include the past-due amount in your repayment plan as well.

The repayment plan must also show how your remaining disposable income will be allocated to your remaining unsecured debts after your secured creditors are paid. Not having disposable income won’t necessarily doom your plan, but you must show a good-faith effort to repay your unsecured debts.

How Long Does a Chapter 13 Repayment Plan Last?

Chapter 13 bankruptcy plans last anywhere from three to five years, depending on your income. According to the Bankruptcy Code, if your average monthly income for the six months before filing for bankruptcy was more than your state’s median income, your payment plan will be for five years.

If your average monthly income is above the median state income, your plan will be for three years. If you pay off all your debts before the end of your repayment plan, the court will close your bankruptcy case. This will help in rebuilding your credit rating and allows you to make regular payments without a plan.

Failing To Make Plan Payments

There may be times when you cannot make your payments on time. If you have a significant life alteration such as losing your job, it’ll be difficult to meet the terms of your Chapter 13 plan. If this happens, let the bankruptcy trustee know. They may be able to modify your payment plan to match your new circumstances.

If making payments according to your repayment plan would pose an undue hardship, the bankruptcy judge may decide to discharge your debts. This is rare at best.

If neither of these options is available to you, you may be able to convert your Chapter 13 reorganization bankruptcy to a Chapter 7 liquidation bankruptcy. You can ask the bankruptcy court to dismiss your bankruptcy case altogether, but you’ll need excellent reasons for it to do so.

If the court dismisses your case, you will still owe your debts and any interest that would have accrued during the bankruptcy proceedings.

The End of a Chapter 13 Reorganization Bankruptcy

If you complete all the payments specified by your Chapter 13 repayment plan, the judge will discharge all of the remaining qualifying debts. Before the bankruptcy court will do so, you must prove that you are current on all of your non-dischargeable debts and that you have completed an accredited debtor education course.

Disclaimer: State and federal laws change frequently due to new legislation, higher court rulings, and other means. While FindLaw strives to provide the most current information, consult a local bankruptcy attorney to confirm your state laws.

Contact an Experienced Bankruptcy Attorney for Help With Your Chapter 13 Case

Filing for bankruptcy is never easy, especially when it comes to a Chapter 13 bankruptcy case. If you don’t follow the bankruptcy laws, the judge will dismiss your case and you’ll have to start over. If you ever reach a moment when you’re not sure about how a law works, consulting an experienced bankruptcy lawyer is a good idea.

Bankruptcy attorneys are familiar with the Bankruptcy Code and understand how a Chapter 13 works. They’ll help you create a repayment plan that satisfies the bankruptcy trustee and your creditors. A skilled bankruptcy lawyer will also be ready to deal with any issues encountered during your confirmation hearing.

Additional Resources:

• Chapter 13 Background and Advantage
• Debts That Remain After a Chapter 13 Discharge
• Pros and Cons of Declaring Chapter 13 Bankruptcy