Save your home and car

Chapter 13 Bankruptcy

Keep Your Property & Repay Debts Over Time

Stop creditors and get more time to pay.

Would you rather pay more of your monthly income toward important bills like late house and car payments, and less toward credit card balances, overdue utility debt, and medical bills? If so, filing for Chapter 13 bankruptcy might be the solution you're looking for.  Our plain-English guide will help you:

  • determine if you qualify for Chapter 13
  • learn how to catch up on your mortgage and keep your home
  • find out if you can reduce your car loan balance
  • rebuild your credit after bankruptcy
  • and much more!
  • Product Details
  • Chapter 13 bankruptcy offers unique debt solutions not available in Chapter 7 bankruptcy. Yes, you’ll pay into a repayment plan. But your money will go toward the debts that matter most—like your mortgage, car loan, support obligations, and taxes. Remaining debts, such as credit card balances, medical bills, and utility bills, usually get only a fraction of what you owe.

    Some of Chapter 13 bankruptcy’s other features include allowing filers to:

    • keep all property
    • avoid foreclosure and vehicle repossession
    • pay the fair market value for a car, and
    • stop lawsuits, wage garnishments, and bank levies.

    This revised edition covers all the latest changes in bankruptcy and is eco-friendly—we’ve moved many tables and forms online!

    “In Nolo’s usual thorough fashion, here is a guide to an alternative to the typical Chapter 7 bankruptcy.”—Orange County Register

    “Cannot be recommended too highly…”—Los Angeles Times

    Number of Pages
  • About the Author
    • Cara O'Neill, Attorney · University of the Pacific McGeorge School of Law

      Cara O'Neill is a legal editor at Nolo, focusing on bankruptcy and small claims. She also maintains a bankruptcy practice at the Law Office of Cara O’Neill and teaches criminal law and legal ethics as an adjunct professor. Cara has been quoted in bankruptcy, finance, small claims, and litigation articles by news outlets that include USA Today, CNBC, U.S. News & World Report, Nerd Wallet, and Yahoo Finance.

      Cara received her law degree from the University of the Pacific, McGeorge School of Law, where she graduated a member of the Order of the Barristers—a highly-selective honor society that gives national recognition to top law school graduates demonstrating excellent skills in trial advocacy, oral advocacy, and brief writing.

      Working at Nolo. Cara started writing for Nolo as a freelancer in 2014 and became a full-time legal editor in 2016. She has authored a number of Nolo self-help legal books, including How to File for Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, The New Bankruptcy, Everybody's Guide to Small Claims (national version), and Everybody's Guide to Small Claims in California. She also co-authors and edits Solve Your Money Troubles and Credit Repair and has written hundreds of articles for,,, and

      Early legal career. Before joining Nolo, Cara spent 20 years working as a trial attorney litigating criminal and civil cases. She also served as an administrative law judge mediating disputes between auto manufacturers and dealerships and began teaching law as an adjunct professor in 2004. She added bankruptcy to her practice after the 2008 financial downturn.

      Origins of litigation and writing career. Thanks to her mother, Cara’s advocacy training began early and involuntarily. In junior high school, she took second place two years running in the local Optimist Club speaking competition. She also successfully competed on her high school speech and debate team for several years, eventually serving as president of the same. During law school, she competed on a nationally ranked ABA moot court team for two years (and was recruited for a third, but declined) and served as a law journal editor.

  • Table of Contents
  • Part I: Is Chapter 13 Right for You?

    1. How Chapter 13 Works

    • An Overview of Chapter 13 Bankruptcy
    • Debts Discharged in Chapter 13 Bankruptcy
    • Chapter 13 Bankruptcy and Foreclosure
    • Special Chapter 13 Features: Cramdowns and Lien Stripping
    • Is Chapter 13 Right for You?
    • Alternatives to Bankruptcy

    2. The Automatic Stay

    • How the Automatic Stay Works
    • How Long the Stay Lasts
    • How the Stay Affects Common Collection Actions
    • How the Stay Affects Actions Against Codebtors
    • When the Stay Doesn’t Apply
    • Evictions

    3. Are You Eligible to Use Chapter 13?

    • The Effect of a Previous Bankruptcy Discharge
    • Business Entities in Chapter 13
    • Chapter 13 Debt Limits
    • Providing Income Tax Returns
    • Child Support and Alimony Payment Requirements
    • Annual Income and Expense Reports
    • Drafting a Repayment Plan
    • Paying to Keep Nonexempt Property
    • You Must Take Two Educational Courses

    4. Do You Have to Use Chapter 13?

    • What Is the Means Test?
    • The Means Test
    • Classifying Your Debts
    • Forced Conversion to Chapter 13

    5. Can You Propose a Plan the Judge Will Approve?

    • Repayment Plan Calculations: An Overview
    • If Your Current Monthly Income Is Less Than Your State’s Median Income
    • If Your Current Monthly Income Is More Than Your State’s Median Income
    • Understanding Property Exemptions

    6. Making the Decision

    Part II: Filing for Chapter 13 Bankruptcy

    7. Complete Your Bankruptcy Forms

    • Required Forms, Fees, and Where to File
    • For Married Filers
    • Voluntary Petition for Individuals Filing for Bankruptcy (Form 101)
    • Forms Relating to Eviction Judgments (Forms 101A and 101B)
    • Schedules (Forms 106A/B-J)
    • Summary of Your Assets and Liabilities and Certain Statistical Information (Form 106Sum)
    • Declaration About an Individual Debtor’s Schedules (Form 106Dec)
    • Your Statement of Financial Affairs for Individuals Filing for Bankruptcy (Form 107)
    • Your Statement About Your Social Security Numbers (Form 121)
    • Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period and Chapter 13 Calculation of Your Disposable Income (Forms 122C-1 and 122C-2)
    • Disclosure of Compensation of Attorney for Debtor (Form 2030)
    • Mailing Matrix
    • Income Deduction Order

    8. The Chapter 13 Plan

    • National Chapter 13 Plan (Form 113)
    • Chapter 13 Plan Requirements
    • Repayment of Unsecured Debts: Allowed Claims
    • Drafting Your Plan
    • Sample Plan

    9. Filing the Bankruptcy Case

    • Other Documents You’ll File
    • Paying the Filing Fee
    • Electronic Filing
    • Emergency Filing
    • After You File

    10. Handling Routine Matters After You File

    • The Automatic Stay
    • Dealing With the Trustee
    • Make Your First Payment
    • If You Operate a Business
    • The Meeting of Creditors
    • Changing Your Plan Before the Confirmation Hearing
    • The Confirmation Hearing
    • Changing Your Plan After a Failed Confirmation Hearing
    • Amending Your Bankruptcy Forms
    • Filing a Change of Address
    • Filing Tax Returns
    • Filing Annual Income and Expense Statements
    • Personal Financial Management Counseling
    • Chapter 13 Debtor’s Certifications Regarding Domestic Support Obligations and Section 522(q) (Form 2830)

    Part III: Making Your Plan Work

    11. Common Legal Issues

    • Filing Motions
    • Dealing With Creditors’ Motions
    • If an Unsecured Creditor Objects to Your Plan
    • Handling Creditor Claims
    • Asking the Court to Eliminate Liens

    12. Carrying Out Your Plan

    • Your Income Increases
    • Selling Property
    • Modifying Your Plan When Problems Come Up
    • Attempts to Revoke Your Confirmation
    • When You Complete Your Plan

    13. If You Can’t Complete Your Plan

    • Dismiss Your Case
    • Convert Your Case to Chapter 7 Bankruptcy
    • Seek a Hardship Discharge

    14. Life After Bankruptcy

    • Rebuilding Your Credit
    • Attempts to Collect Discharged Debts
    • Postbankruptcy Discrimination
    • Attempts to Revoke Your Discharge

    Part IV: Help Beyond the Book

    15. Hiring and Working With a Lawyer

    • What Does Legal Representation Mean?
    • How to Find a Bankruptcy Lawyer
    • What to Look for in a Lawyer
    • Paying Your Lawyer
    • Working With Your Lawyer

    16. Legal Research

    • Where to Find Bankruptcy Law
    • Bankruptcy Background Materials: Overviews, Encyclopedias, and Treatises
    • Finding Federal Bankruptcy Statutes
    • Finding the Federal Rules of Bankruptcy Procedure (FRBP)
    • Finding Local Court Rules
    • Finding Federal Court Bankruptcy Cases
    • State Statutes
    • State Court Cases
    • Other Helpful Resources



    • How to Use the Downloadable Forms on the Nolo Website
    • List of Forms Available on the Nolo Website


  • Sample Chapter
  • Chapter 1:
    How Chapter 13 Works

    Chances are good that you’ve picked up this book because your debts have become overwhelming. Maybe you’re facing foreclosure on your home or repossession of your car. Or perhaps you’re a high-income earner whose debts have grown beyond your ability to repay them. If so, Chapter 13 can help.

    If you’re like many, you might prefer to file for Chapter 7 bankruptcy—the chapter individuals file most frequently. Not only is Chapter 7 over in a matter of months, but filers don’t repay creditors in a repayment plan.

    But, not everyone qualifies for Chapter 7. And Chapter 13 offers benefits that Chapter 7 doesn’t—some of which are so helpful that people who qualify for Chapter 7 sometimes choose Chapter 13 instead.

    For instance, Chapter 13 allows a debtor to repay obligations over time, and often at a discount. Many filers use the Chapter 13 repayment plan to catch up on back payments so that they can keep a house, car, or other property that they’d lose otherwise. Others use it to pay off debts that aren’t wiped out in bankruptcy, such as back taxes or child support arrearages. These problems can’t be solved using Chapter 7.

    If you want to know more about how Chapter 13 works and what it can do for you, this is the book. It stops short of giving you all the forms and instructions you would need to do your own Chapter 13 bankruptcy, however. The reality is that very few people can carry out this task without attorney representation. (See “Do You Need a Lawyer?” below.)

    That said, times are changing, and filing for bankruptcy is getting easier—primarily because the forms are now simpler to use. Even so, the forms don’t explain bankruptcy law or procedure. If you file on your own, you’re responsible for learning the process and understanding how a filing would affect your income and assets.

    But we’re jumping ahead. Before deciding whether Chapter 13 is right for you, there’s a lot to know.

    This first chapter gets you started by providing an overview of all aspects of Chapter 13 bankruptcy, as well as options for dealing with your debts outside of bankruptcy. It’s intended to give you a taste of what filing Chapter 13 involves and its benefits.

    As you go through it, don’t expect to grasp everything right away—it’s a complicated area of law, so naturally, getting the hang of it involves a learning curve.

    Plus, help is always at your fingertips. Each topic discussed in the first chapter is covered in more detail in the following chapters (we tell you where). If you’re having difficulty grasping a concept but want to learn more, feel free to skip ahead.

    Online Companion Page: Get Legal Updates and More at
    You can find critical legal updates on this book’s online companion page at:


    An Overview of Chapter 13 Bankruptcy

    Typically, a Chapter 13 filer has a good income and can afford to repay some amount to creditors, but perhaps not the entire balance owed. Other debtors just need time to catch up on bills they can’t erase in bankruptcy without the threat of a collection lawsuit or wage garnishment looming over the debtor’s head.

    The ability to force a creditor into a Chapter 13 payment plan is quite powerful. Unlike a quick Chapter 7 case, a Chapter 13 filer can restructure bills over three to five years, and in some cases, even pay less than what’s owed.

    Chapter 13 filers also keep all of their property regardless of its value (although this comes at a price—more about this later). In Chapter 7, filers are entitled to things necessary to work and live only, such as a modest car, some equity in a home, household furnishings, and a retirement account. All other property gets sold for the benefit of creditors.

    Chapter 13 has other valuable benefits, too (discussed below in “Reasons to Choose Chapter 13”), but, as mentioned above, the most powerful is that it can help you save your home. Chapter 13 bankruptcy allows you to catch up on mortgage payments through your plan and avoid foreclosure. (See Ch. 8.) And you can eliminate a junior mortgage (a loan in second position or later) that isn’t secured by the equity in your property—something that can occur when your home’s value has decreased and it’s significantly “underwater.”

    Do You Need a Lawyer?

    For the vast majority of Chapter 13 filers, the answer is “yes.” Even bankruptcy courts strongly suggest that filers retain counsel.

    It’s not that people can’t understand how Chapter 13 bankruptcy works or fill out the petition and accompanying schedules and forms. The problem is that Chapter 13 law can be tricky. The difficult part is understanding what will happen to assets, how much to repay creditors, and other complicated Chapter 13 repayment plan requirements. Calculating plan payments is complicated without the assistance of computer software, which is expensive and generally requires bankruptcy knowledge to complete correctly. It is also not uncommon for the trustee—the official responsible for overseeing your case—or creditors to challenge or object to various aspects of your plan. You might have to argue against objections, negotiate with creditors, or modify your plan. Most Chapter 13 plans need at least one modification before receiving court approval, even when prepared by an attorney.

    Experienced Chapter 13 bankruptcy lawyers have software to prepare your Chapter 13 plan and the expertise to handle objections and to modify your plan as needed.

    Overall, we believe that most Chapter 13 filers benefit from legal representation. However, it’s still important to understand the Chapter 13 process, including options for dealing with debts and property, the possibility of reducing loan amounts (called a “cramdown”), and what you can expect to pay in your Chapter 13 plan. This book also helps you identify various tricky issues that might arise in your bankruptcy case. Armed with this knowledge, you’ll be in a better position to help your attorney represent you.

    It’s also helpful to run some preliminary numbers yourself to determine if Chapter 7 is an option for you. You can also identify whether one of the mechanisms exclusive to Chapter 13 will help improve your financial situation, and if so, whether you have enough income to fund a Chapter 13 plan. Chs. 4 and 5 take you through the means test (to see if you qualify for Chapter 7 bankruptcy) and provide step-by-step instructions on figuring out if you can fund a Chapter 13 plan.

    To learn more about hiring and working with a bankruptcy lawyer, see Ch. 15.

    Filing Your Papers

    To begin a Chapter 13 bankruptcy, you disclose all aspects of your financial situation on the bankruptcy forms provided by the bankruptcy court. You’ll list your income, property, debts, and your financial transactions for the years immediately before your filing.

    You’ll also complete two forms to see whether your income is more or less than the median income in your state. The calculation determines how long your repayment plan must last. If your income is more than the state median, your plan must last five years with a few exceptions. If your income is less than the median, you can propose a three-year plan.

    Finally, you’ll prepare a Chapter 13 repayment plan for court approval. Your plan shows how you propose to pay certain mandatory obligations (child support, tax arrearages, and so on) and secured debts (debts guaranteed with collateral) on any property you intend to keep. If you have sufficient disposable income, you’ll also pay at least a portion of your other unsecured debts over the three- to five-year period. (See Ch. 8.) Other things you’ll need to do will include:

    • filing a certificate showing you participated in a credit counseling program during the 180 days before filing (as explained in Ch. 9)
    • completing a debtor education course before making your final plan payment, and
    • completing a certificate regarding child support obligations and your residence (not all filers have to do this).

    All filers must submit financial documents verifying the figures in the bankruptcy paperwork. You’ll file them with the court or provide them to the trustee, depending on the rules of your local jurisdiction.

    Such documents can include:

    • pay stubs from the 60 days before you file, along with a cover sheet
    • proof that you’ve filed your federal and state income tax returns for the previous four years
    • a copy of your most recent IRS income tax return (or a transcript of that return), and
    • if you’re a business owner, profit and loss statements (business owners can file for Chapter 13, but not the business itself).

    Chs. 7 through 9 discuss in detail the bankruptcy forms, repayment plan, and filing process.


    Everyone who files for Chapter 13 must pay the filing fee of $313. You’ll also pay about $60 to a credit counseling agency for prefiling credit counseling and postfiling debt management counseling.

    If you decide to hire a lawyer to help you with your case, you can expect to pay an additional $3,000 or more in legal fees, depending on the prevailing rate in your area. In most cases, you won’t have to pay the entire legal fee all at once. Many attorneys will ask you to make an initial payment—which could be as low as $100 but likely more—and allow you to pay the rest through your plan.

    The Repayment Plan

    You’ll submit the repayment plan with your other bankruptcy papers or shortly after your initial filing. The plan shows your creditors, the trustee, and the judge that you have enough income to pay mandatory amounts (priority debts and secured debts if you want to keep the collateral). It also explains how much “disposable income” remains to pay nonpriority unsecured debts—for instance, credit card balances, medical bills, and personal loans.

    Debts You Must Repay

    Chapter 13 requires you to pay particular, high-priority debts in full through the plan, including recent income tax debt, domestic support obligations, and mortgage and car loan arrearages if you want to keep a car or home.

    But that’s not all. You’ll have to show that you can keep up on your other obligations, too, such as a mortgage or car note and other monthly living expenses. The amount left, which is known as your “disposable income,” will be used toward your remaining debts.

    But you’ll need to overcome another hurdle. As explained further in Ch. 3, your plan must pay your unsecured creditors—credit cards, medical bills, personal loans, and the like—at least as much as you would have paid if you’d filed for Chapter 7 instead. Here’s a simple way to think of it: The amount you pay to unsecured creditors in Chapter 13 must meet or exceed the value of the property you’d have given up in Chapter 7. This formula ensures that your creditors aren’t unfairly prejudiced by the fact that you can keep property in Chapter 13 that you would lose in Chapter 7.

    To determine this amount, calculate the value of all property you can’t protect with a bankruptcy exemption. Then subtract the costs, commissions, and fees necessary to sell the property, including the trustee’s fee, which can be substantial. The final figure is the minimum amount you’d have to pay your unsecured creditors.

    If you have enough disposable income to pay more, you’ll pay it toward the unsecured debt, up to 100% of your debt balance. You don’t have to pay more than you owe.

    Why would someone pay 100% of what they owe in Chapter 13? It often happens when someone with a significant amount of disposable income uses Chapter 13 to pay off nondischargeable debts, like taxes or support obligations. If their disposable income covers 100% of their debts, they must fully repay every debt they owe if they want to use Chapter 13 to stop creditor collections during the repayment period.

    It can also happen when someone has a lot of equity they can’t protect with a bankruptcy exemption in a property they’d like to keep. For instance, suppose a filer who owns a house with $200,000 equity, $100,000 of which is nonexempt (isn’t protected), has a credit card creditor with a $50,000 money judgment threatening to seize the house. What should the filer do to prevent losing the home?

    Filing for Chapter 7 wouldn’t help because the trustee could sell the house and use the nonexempt sales proceeds to pay the creditor in full.

    Chapter 13 would be a better solution because a Chapter 13 trustee doesn’t sell property; however, under the rules, the filer must pay unsecured creditors as much as Chapter 7 unsecured creditors would receive. Because the creditor would be fully paid the $50,000 owed in Chapter 7, our filer would need to pay $50,000, or 100% of the filer’s unsecured debt.

    Even though the filer wouldn’t get a discount on the debt, there’s still a benefit to filing for Chapter 13. A filer with sufficient income can spread the payments over five years. In essence, by filing for Chapter 13, our filer can force the credit card creditor to accept a five-year payment plan and keep the house.

    Repayment Period Length

    You must propose a three- or five-year repayment plan depending on your income. As you’ll learn in Ch. 4, a filer whose gross monthly income averaged over the six months before filing is more than the median income in their state must propose a five-year repayment plan (unless the plan pays 100% of the filer’s unsecured debt). For more plan length information, see Ch 5.

    Filers whose average gross monthly income for the six months before filing is less than the state median can choose between Chapters 7 and 13. If they use Chapter 13, these filers can propose a three-year repayment plan and use their actual expenses to calculate how much they’ll devote to the plan. Such filers sometimes opt to pay a smaller payment over five years to increase their chances of getting their plan approved by the court.

    To learn more about how to calculate your income, find out whether your income is above or below your state’s median, and figure out which expenses to use in calculating your plan payments, see Ch. 4.

    Coming Up With a Plan the Judge Will Approve
    You can’t proceed with a Chapter 13 bankruptcy unless a bankruptcy judge approves (confirms) your plan. You’ll have to propose a plan that meets all requirements and prove that you have enough income to fund it.

    However, some judges will confirm a “zero-percent” plan that doesn’t repay any portion of credit card balances or other nonpriority unsecured debts. Filers use it if they don’t have any disposable income left after paying child support arrearages and other required obligations. It’s an excellent benefit if you have large nondischargeable debts because it offers the best of both Chapter 7 and 13. You can get a complete discharge of qualifying debt along with time to pay off a nondischargeable tax bill or domestic support obligation without worrying about a potential wage garnishment.

    You might have more—or less— disposable income than you think. Chapter 13 requires you to commit your “projected disposable income” to repaying your debts over the life of your plan. Initially, you calculate your projected disposable income by subtracting your allowable expenses from your average income during the six months before you file for bankruptcy. But if this doesn’t give an accurate picture of your current income and expenses and given certain circumstances, you might be able to use your current income and expenses at the time you file, if those figures more accurately reflect your finances going forward. For more information on calculating your disposable income, see Ch. 5

    The Automatic Stay

    When you file for Chapter 13 bankruptcy, the automatic stay goes into effect right away. The stay prevents most creditors from taking action to collect a debt against you or your property. For instance, if you’re facing a home foreclosure or a vehicle repossession, the stay will stop the proceeding in its tracks. However, the automatic stay will be limited if the court recently dismissed a bankruptcy case and won’t apply if the court dismissed two recent bankruptcies. You’ll find more automatic stay details in Ch. 2.

    The Meeting of Creditors

    As soon as you file your bankruptcy papers, the court will send out a notice of a “meeting of creditors” or “341 hearing” that will take place within 20 to 40 days after your filing date. If you and your spouse filed jointly, you’ll both attend. You’ll each need to bring two forms of identification—a picture ID and proof of your Social Security number.

    The Chapter 13 bankruptcy trustee conducts the creditors’ meeting in a conference room, not a courtroom. No judge will be present, but filers must cooperate with the trustee.

    Keep in mind that if your meeting is held in a federal building, there might be restrictions on what you can bring with you. Check beforehand.

    A typical creditors’ meeting lasts less than 15 minutes. The trustee will ask any questions raised by the information entered in the forms. The trustee will be interested in the legality of your proposed repayment plan and your ability to make the payments. (See Ch. 8 for more on Chapter 13 plans.) The trustee has a vested interest in your plan’s approval because the trustee gets paid a percentage of all payments your creditors receive.

    The trustee will also require proof that you’ve filed your tax returns for the previous four years. The trustee might continue the meeting to give you a chance to file them if needed. Ultimately, you won’t be able to proceed unless your tax filings are up to date.

    Help if you’re behind in tax payments. Many people who owe taxes benefit from professional help in the form of a tax attorney, an enrolled agent (licensed by the IRS), or a tax preparer. For more information on getting current on taxes and getting professional help, read Stand Up to the IRS, by Frederick W. Daily and Stephen Fishman (Nolo).

    When the trustee finishes asking questions, any creditors who’ve appeared will have a chance to question you. It’s unlikely that a creditor will show, but if one does, you’ll be required to answer questions related to your past and present financial circumstances.

    Disgruntled creditors or those suspecting fraud might come to gather evidence to support their case, much like litigants do in a deposition. They’ll likely evaluate whether to proceed after the hearing. If they do, expect your answers to be used against you.

    By contrast, filers often learn whether the trustee has an objection to the plan. You might be able to modify it to accommodate the trustee. If you can’t resolve the issue, the trustee or creditor will object in writing in a formal motion, and a bankruptcy judge will decide the matter at the plan confirmation hearing (more below).

    Plan Objections

    A creditor who has an objection to the proposed plan is unlikely to voice that objection at the meeting of creditors. Instead, the creditor will file a motion with the court. The trustee will also file a motion if you can’t resolve a problem informally.

    For instance, a trustee or creditor might claim your plan isn’t feasible if you don’t have enough income to make the required plan payment.

    But that isn’t the only objection you might face. Creditors often claim they’re legally entitled to more money, or that you could pay more if you decreased overly luxurious living expenses.

    The trustee will often weigh in on a creditor’s position, and, as a general rule, the judge will go along with the trustee unless your lawyer can point out an error.

    The Confirmation Hearing

    Chapter 13 bankruptcy requires at least one appearance by you or your attorney before a bankruptcy judge. (In some districts, the judge comes into the courtroom only if the trustee or a creditor objects to your plan and you want the judge to rule on the objection.) At this “confirmation hearing,” which is usually held a few weeks after the creditors’ meeting, the judge either confirms (approves of) your proposed plan or sends you back to the drawing board for various reasons—usually because your plan doesn’t meet Chapter 13 requirements. For example, a judge might reject your plan because you don’t have enough income to pay off your priority creditors in full while staying current on your secured debts, such as a car note or mortgage.

    You’re entitled to amend your proposed plan until you get it right or the judge decides that it’s hopeless. During this time, though, you must make payments to the trustee under your proposed plan. Each amendment requires a new confirmation hearing and appropriate written notice to your creditors. (For more information on the confirmation hearing, see Ch. 10.) Once your plan is confirmed, it will govern your payments for the three- to five-year repayment period.

    Possible Additional Court Appearances

    If your plan is prepared perfectly from the beginning, your confirmation hearing will probably be the only time the bankruptcy judge deals with your case. However, additional court appearances by you or your attorney might be necessary to:

    • confirm your repayment plan if you need to modify or change your plan
    • value an asset, if your plan proposes to pay less for a car or other property and the creditor objects to the valuation
    • respond to requests by a creditor or the trustee to dismiss your case or amend your plan
    • respond to a creditor who opposes your right to discharge a particular debt (perhaps claiming that you incurred the debt through fraud)
    • discharge a type of debt that can be discharged with court approval (for example, to discharge a student loan because of undue hardship)
    • eliminate a lien on your property that will survive your Chapter 13 bankruptcy unless the judge removes it, or
    • reaffirm a debt owed on a car or other secured property that the discharge would erase otherwise.

    Many of these procedures are explained in Ch. 11.

    Making Your Payments Under the Plan

    You’re required to make your first proposed plan payment within 30 days after filing for bankruptcy. If the bankruptcy court confirms your plan, the trustee will continue distributing your payment according to the plan terms. If your Chapter 13 case never gets off the ground, the trustee will return the money to you, less administrative expenses. If the judge ordered payments made to your secured creditors before plan confirmation, the trustee will deduct the payments from the total returned to you.

    Once confirmed, you’ll continue to make plan payments to the bankruptcy trustee. In some jurisdictions, the trustee will require you to agree to an order that takes the payments directly out of your bank account or paycheck (this option isn’t available everywhere, although many filers would like to take advantage of it). The trustee uses your monthly payments to pay the creditors the amount in your plan. The trustee also collects a statutory fee of roughly 8% to 10% of the plan payment.

    If you can show a history of uneven income payments over the year—for example, quarterly royalty payments or seasonal income fluctuations common in construction work—your plan might provide for payments when you typically earn income, rather than every month. Still, in most cases, it will be monthly.

    If Something Goes Wrong

    Three to five years is a long time. What happens if you can’t make a payment or it becomes apparent—perhaps because of a change in your income or life circumstances—that you won’t be able to complete your plan? If you miss only a payment or two, the trustee might agree to let you make up the difference. However, if you lose your income stream, you might be able to modify the plan. If you can’t complete the plan, other options include converting your bankruptcy to Chapter 7 and obtaining a “hardship” discharge from the court. And sometimes, Chapter 13 bankruptcies are dismissed without a discharge.

    Several factors will determine the best solution, such as your debt type and whether you’d lose property if you converted to Chapter 7.

    If the court dismisses your case, you’ll owe your creditors the original debt balance and accrued interest minus any payments made. See Chs. 12 and 13 for more on what happens if you can’t complete your plan.

    Personal Financial Management Counseling

    Before you make your last plan payment, you’ll have to complete a debtor education course covering personal financial management and file a form certifying that you did so before you’ll get your discharge. This course covers basic budgeting, managing your money, and using credit responsibly. See Ch. 10 for more on this requirement.

    After You Complete Your Plan

    Before the court will issue a discharge and close the case, you’ll need to certify you’re current on ongoing child support and alimony obligations and file proof that you’ve completed debt management counseling. The court will discharge all remaining obligations other than long-term debts you’re not required to pay in full, like mortgages and student loans. (See “Which Debts Are Discharged in Chapter 13 Bankruptcy,” below, for more information.) For instance, if you have $40,000 in credit card debt and pay off $10,000 through the plan, your discharge will erase the remaining $30,000 once you complete all plan requirements. It will work the same way for other dischargeable debts. Practically speaking, most people will emerge from Chapter 13 bankruptcy debt-free except for student loan and mortgage balances.

    Example: Kaitlyn owes $60,000 in credit card debts, $60,000 in student loans, and $2,000 in alimony. Kaitlyn pays the alimony arrears in full as required and 10% of her credit card and student loan debt. The discharge will erase the remaining credit card balance, but she’ll still owe her $54,000 student loan debt unless she files a lawsuit and convinces the judge to discharge it because of undue hardship.

    Debts Discharged in Chapter 13 Bankruptcy

    You’ll take care of most debts in your Chapter 13 case by either paying them off or getting them wiped out. But a few exceptions exist.

    Debts You Can Discharge

    As a general rule, whatever you still owe will be wiped out at the end of your plan, including most credit card debts, medical bills, lawyer fees, court judgments, and personal loans. You can also discharge mortgages and car loans if you return the property to the lender. These rules apply to both Chapter 7 and Chapter 13 cases.

    Debts you can discharge in Chapter 13 but not Chapter 7 include:

    • nonsupport-related debts owed to an ex-spouse arising from a divorce or separation agreement
    • debts incurred to pay taxes (for instance, you can discharge the balance of a credit card used to pay taxes)
    • noncriminal government fines and penalties
    • debts for willfully and maliciously damaging property
    • debts for loans from a retirement plan, and
    • debts that couldn’t be discharged in a previous bankruptcy.

    Debts You Can’t Discharge

    After completing a plan, many people are free of all debt or receive a discharge for any remaining balances owed. But that’s not always the case. Debts that could survive a Chapter 13 bankruptcy include:

    • debts that you don’t list in your bankruptcy forms
    • student loans (unless you can show hardship)
    • collateralized loans that wouldn’t usually be paid off during the plan period, such as a mortgage (if you keep the property)
    • debts incurred after your Chapter 13 filing date.
    Discharging Student Loans in Chapter 13 Bankruptcy: The Brunner Test

    For the most part, student loans can’t be discharged in Chapter 13 bankruptcy.

    However, in rare circumstances, courts will discharge some or all of your student loans at the end of your Chapter 13 repayment period if paying them would cause undue hardship. The reason it doesn’t happen often is because the bar to prove undue hardship (as opposed to ordinary hardship) is too high for most debtors.

    Many courts use a three-factor test to determine if repaying your student loans would cause undue hardship, called the Brunner test (after a court case of the same name). Not all courts use this test, but even in those that don’t, it’s still difficult to discharge a student loan.

    Under the Brunner test, a bankruptcy court looks at the following three factors to determine if repayment of your student loans would cause undue hardship:

    • Based on your current income and expenses, you cannot maintain a minimal standard of living for yourself and your dependents if you’re forced to repay your loans.
    • Your current financial situation is likely to continue for a big part of the repayment period.
    • You have made a good faith effort to repay your student loans.


    Debts You Can’t Discharge If the Creditor Successfully Objects

    Some types of debts will survive your bankruptcy only if the creditor files papers and goes to court to prove that the debt shouldn’t be discharged. For example, suppose a creditor successfully claims a debt arose from your fraudulent actions, such as recent credit card charges for luxuries. In that case, those debts will be waiting for you after your bankruptcy unless you paid them during your repayment plan.

    Chapter 13 Bankruptcy and Foreclosure

    If you’re behind on your mortgage payments or facing foreclosure, Chapter 13 bankruptcy might be able to help you keep your home. It can do this by allowing you to temporarily (or permanently) stop the foreclosure and catch up on back mortgage payments through your plan. Some filers can get rid of junior liens, although this option isn’t used much. It’s only available when real estate values are less than what the homeowner owes. Some courts also have programs designed to help work out a foreclosure alternative with your lender.

    The Automatic Stay Can Stop a Foreclosure

    If you’re facing foreclosure, in most situations, filing a Chapter 13 bankruptcy will immediately stop the foreclosure process, at least temporarily. However, there are exceptions if you filed bankruptcy within the previous two years or if a lender proceeded with foreclosure after the dismissal of a previous bankruptcy case. These provisions are in place to prevent a filer from using serial bankruptcy filings to stall foreclosure indefinitely. (See Ch. 2 for more on the automatic stay and home foreclosures.)

    Catching Up on Mortgage Arrears Through Your Chapter 13 Plan

    You must remain current on a secured debt, such as your house payment, if you want to keep the property. When you signed your loan documents, you agreed that the bank could take the house if you failed to live up to your obligation.

    Your contract remains in place even if you file for bankruptcy. So, to stay in the home, you must continue paying for it. One of the benefits of Chapter 13 is that it allows you to include your past-due mortgage debt in your Chapter 13 plan. You can continue making your monthly payment, pay the arrears back over the length of your plan, and remain in the house.

    The same is true of past due homeowners’ association assessments—you can catch up through your plan. As long as you keep making your regular mortgage payments (and your ongoing HOA assessments) and your Chapter 13 plan payments, your lender cannot foreclose. Chapter 7 bankruptcy, on the other hand, doesn’t provide a way to catch up on mortgage arrears. For this reason, Chapter 13 bankruptcy is often the best avenue for saving your home if you’re behind in your mortgage or HOA assessments.

    Getting Rid of Second Mortgages, HELOCs, and Other Junior Liens

    Chapter 13 bankruptcy has another helpful remedy for those who meet its qualifications—lien stripping. Lien stripping allows you to remove junior mortgages, home equity lines of credit (HELOCs), and other wholly unsecured liens from your home. (A loan is wholly unsecured if, after selling the property and paying off the senior liens, nothing would remain to pay toward the junior lien— not even a dollar.) A homeowner is often better positioned to afford the remaining mortgages by getting rid of some or all of these payments. (See “Lien Stripping: Getting Rid of Second Mortgages and Other Liens on Real Estate,” below.)

    Foreclosure Mediation Programs in Bankruptcy

    An increasing number of bankruptcy courts instituted programs to help debtors resolve foreclosure issues with their lenders. These programs (often called “loss mitigation programs”) vary by district. Most involve some form of foreclosure mediation wherein a neutral mediator helps both sides work out a foreclosure alternative. Possible workouts might include a loan modification, short sale, or deed in lieu of foreclosure. Most of these bankruptcy court programs apply only to residential property. But a few also include income-producing residential property (rental property) and second homes.

    Deficiency Balances Are Discharged in Bankruptcy

    A deficiency occurs when the amount you owe on your home exceeds the value of the home. In many states, after foreclosing on your home, the mortgage lender can sue you for the deficiency (in some states, the lender can get the deficiency judgment through the foreclosure itself without filing a separate lawsuit). But Chapter 7 and Chapter 13 bankruptcies discharge all mortgage deficiencies. Knowing this provides an incentive for the mortgage lender to work out a deal with you if your property is worth less than you owe.

    Special Chapter 13 Features: Cramdowns and Lien Stripping

    You might be able to reduce the amount of a secured loan (for example, your car loan) to the actual value of the property in a “cramdown.” And you might be able to get rid of second or third mortgages, HELOCs, or home equity loans that aren’t secured by home equity using “lien stripping.”

    Although these provisions are powerful, they don’t apply to the first mortgage of your residential real property. Some people believe they can “modify” the first mortgage on their home through Chapter 13. For the most part, this is a myth, although a few exceptions exist for vacation and rental properties.

    You lose the benefit of cramdown or lien stripping if your case is dismissed or converted to Chapter 7. Loan reductions or lien eliminations you get through cramdown or lien stripping are only good if you complete all of your payments under the Chapter 13 plan (or under a Chapter 11 bankruptcy). If your case is dismissed or converted to a Chapter 7, the secured creditors get their full lien amounts back, less anything paid through your plan.

    You might be able to modify your mortgage through nonbankruptcy avenues. Although you can’t modify a mortgage in the first position on a residential home through bankruptcy, you might be able to negotiate with your lender directly to reduce your interest rate, payments, or more. Or, look into government programs designed to help homeowners modify their mortgages. For more information, check out Nolo’s Foreclosure section at or get Your Foreclosure Survival Guide, by Amy Loftsgordon (Nolo).

    Cramdowns: Reducing Secured Loans to the Value of the Collateral

    If you owe more on a secured loan than the value of the collateral (the property pledged to guarantee loan payment), a cramdown might be beneficial. Cramming down a loan reduces the amount owed to the collateral’s value without the lender’s agreement.

    While a cramdown sounds great, there’s a catch—you must pay the reduced balance in full through your Chapter 13 plan. So while it might sound promising, only high-earning filers can afford to cram down the amount owed on a high-value vacation home or similar property.

    Property Eligible for Cramdown
    You can only use a cramdown on loans secured by certain types of property. Significantly, you cannot cram down mortgages on your personal residence. But you might be able to use it on a mobile home mortgage or a mortgage for a multiunit building if you live in one of the units. Mortgages on your investment properties, such as rental property, a second home, or commercial property, are eligible. A cramdown is also available, subject to certain limitations, for car loans and other personal property loans.

    Car loans. Cramdowns are often used for car loans. There are a few restrictions to keep in mind, however. To cram down a car loan, one of the following must apply:

    • You incurred the debt at least 910 days before you filed for bankruptcy.
    • The loan is not a purchase money loan (perhaps you secured the debt with a car you already owned, not a car you bought with the loan).
    • The car secured by the loan is not a personal vehicle (for instance, if you bought it for your business).
    Cramming Down Negative Equity in the 9th Circuit

    If you bought a car within 910 days of your bankruptcy filing (which means your loan is ineligible for cramdown), you might be able to cram down part of the loan if you traded in a car to buy the new car.

    If, when you purchase a car, you trade in a car that is underwater (you owe more on the car than the car is currently worth), the lender often adds the difference between the trade-in value of your car and the remaining loan balance to your new car loan. For example, say your old car is worth $5,000, but you still owe $8,000 on the car loan. The lender for your current car purchase takes your old car as a trade-in and adds $3,000 ($8,000 loan balance minus the $5,000 car value) to your new car loan. This amount is called “negative equity.”

    In the 9th Circuit, if you file for bankruptcy, you can treat the $3,000 as unsecured debt, even if you bought the second car within 910 days of your bankruptcy filing. (In re Penrod, 611 F.3d 1158 (9th Cir. 2010).)


    Other personal property loans. You can cram down debts for personal property (other than motor vehicles) only if you took out the loan at least a year before you filed for bankruptcy, or if the loan wasn’t used to purchase the property pledged to secure repayment.

    Real estate loans. You might be able to use a cramdown to reduce a mortgage secured by the following types of properties:

    • multiunit buildings (even if you live in one of the units) vacation or rental homes
    • buildings or lots adjacent to your home that aren’t likely to be considered part of your residence, such as farmland
    • mobile homes (these are considered to be personal property), and
    • property that isn’t your residence.

    How Cramdown Works
    In bankruptcy, undersecured debt occurs when you owe more than the value of the property pledged to secure repayment. You can break undersecured debt into secured and unsecured portions. The amount equal to the value of the property is the secured portion. Any amount over the value of the property is unsecured.

    The first step in a cramdown is accurately valuing the property. You can ask the court to value your property through the plan or in a separate motion. (See Ch. 8 to learn about new notice requirements if you make your request in your plan.) If the creditor objects to your valuation, you’ll present your proof of value, such as an appraisal, and the creditor will have an opportunity to present its own valuation. If the values are not the same and you’re unable to reach a compromise with the secured creditor, the court will hold an evidentiary hearing. You and the creditor bring your appraisers to testify, and the bankruptcy judge makes a decision.

    After the judge determines the value (and thereby the amounts of the secured and unsecured claims), in most cases, you must pay the entire amount of the secured portion through your plan, with interest. The appropriate interest is also determined as part of your motion and usually set at prime plus one to three points. For example, if the prime rate is 3.25%, an appropriate interest rate would be between 4.25% and 6.25%.

    The unsecured portion of the claim is lumped in with your other unsecured debts. Because of the way unsecured debt is treated in a Chapter 13 bankruptcy, many bankruptcy filers pay pennies on the dollar on the unsecured portion.

    Here’s an example of how this works: You owe $20,000 on a car you bought three years ago. The car is now worth $15,000, so only $15,000 of the car loan is secured by the property. You can cram down the loan to $15,000 and pay this amount through your Chapter 13 plan.

    The remaining amount—$5,000—will be added to your unsecured debt and treated like all of your other unsecured debt.

    Determining the Value of the Property
    The appropriate valuation method depends on the type of property you’re valuing.

    Real estate and mobile homes. For real estate and mobile homes, use the current market value of the property. This is best accomplished through a formal appraisal—especially if the secured creditor might contest the value. If you don’t anticipate a fight, using comparable sales in your area will be less expensive than paying for a full appraisal.

    Personal property. For personal property, use the replacement value of the property. Replacement value is not the amount it would cost to replace the item with a new item. Rather, it’s the amount a merchant could get for a used item of similar age and in a similar condition in a retail environment (as opposed to a fire sale or an auction). You can have the property appraised or use some other method to determine its replacement value.

    For motor vehicles, you might be able to use an automotive industry guide, such as the Kelley Blue Book or the National Automobile Dealers Association (NADA) Blue Book. Your court will likely have a preference. Start with the retail value rather than the wholesale value and adjust that amount for the car’s condition and mileage. If the car lender disputes the figure, you might need to have the vehicle appraised.

    Lien Stripping: Getting Rid of Second Mortgages and Other Liens on Real Estate

    With lien stripping, you might be able to eliminate certain second mortgages, HELOCs, and other liens on your real property. Unlike cramdowns, lien stripping can be used to reduce your secured debt payments on your personal residence and other real property. Like a cramdown, it involves valuing the property. Here’s how it works.

    If you have more than one mortgage on your property, you can ask the court to value the property and eliminate or “strip off” any mortgage wholly or completely unsecured. (See Ch. 8 for information on the procedure.) To figure out if a mortgage is entirely unsecured, start with the value of the property and subtract the amount of any mortgages or liens that are more senior (they must be paid off first) to the mortgage you’re trying to strip. If the value of the property is less than the total amount of the senior mortgages and liens, then there is no equity left to secure the mortgage you’re trying to strip. It’s wholly unsecured and eligible for stripping. To get the lien stripped, you must file a motion with the court. If the court grants your motion, the lien is removed from your property and the debt will be treated as an unsecured debt.

    Lien stripping is generally not available for first mortgages. A first mortgage, being the most senior lien on the property, will never be completely unsecured. A second or third mortgage, or a HELOC, is usually eligible for lien stripping if it is wholly unsecured. A mortgage is wholly unsecured if, after selling the property, the sales proceeds are insufficient to pay any portion of the junior mortgage.

    If you have a homeowners’ association or condominium association lien, however, you might not be able to strip it, even if it’s wholly unsecured. Whether you can depends on state law and the way the lien was created. (Consult with a local attorney to find out.)

    Example: John and Ellen own a home currently worth $100,000. They have three mortgages—the first is $80,000, the second is $27,000, and the third is $50,000. The first mortgage is entirely secured because it is less than the value of the home. The second mortgage is partially secured because the value of the house less the first mortgage ($100,000 – $80,000 = $20,000) is enough to cover part of the second mortgage. Since it is not completely unsecured, it cannot be stripped. John and Ellen have more luck with their third mortgage, which is completely unsecured. When you deduct the amount owed on the first two mortgages from the value of the house, the result is less than zero ($100,000–$80,000 – $27,000 = -$7,000). No equity remains to pay any portion of the third mortgage. John and Ellen can strip the entire $50,000 third mortgage.

    Like a cramdown, when a mortgage is stripped, the underlying debt becomes unsecured and is paid in your Chapter 13 plan along with your other unsecured debts, such as credit cards and medical bills. These creditors get paid out of your disposable income, which for most people is minimal. Therefore, a stripped mortgage is often paid very little through the plan. Once you’ve completed your plan, any remaining balance gets wiped out with other dischargeable unsecured debt.

    Lien stripping is not the same as lien avoidance. In Chapter 13 bankruptcy, you might also be able to “avoid” liens, or get rid of them, if the property is exempt. Although the end result might be the same or similar, lien avoidance is different from lien stripping because it hinges on property exemptions (the law that allows you to protect certain property in bankruptcy). To learn more about lien avoidance, see Ch. 11.

    Is Chapter 13 Right for You?

    For most people, the two choices for bankruptcy relief are Chapter 7 and Chapter 13. In Chapter 7 bankruptcy, you immediately wipe out many debts, but in exchange, you must give up any property you own that isn’t protected by state or federal exemption laws.

    Some people don’t have a choice between Chapter 7 and Chapter 13 bankruptcy. If your income exceeds Chapter 7 bankruptcy qualifications, you’ll have to use Chapter 13 and repay some of your debt. (See Ch. 4 to find out whether you’ll be limited to Chapter 13.) Likewise, if you don’t have a steady income, your only bankruptcy choice is Chapter 7. Many people who can choose between the two decide to file under Chapter 7, but there are some situations when Chapter 13 will be the better option.

    Upper-Income Filers Must Use Chapter 13

    If your average monthly income during the six months before filing is higher than the state median, you won’t qualify for a discharge if your total five-year disposable income would:

    • satisfy at least 25% of your unsecured debt, or
    • amount to $15,150 or more, regardless of the percentage of unsecured debt that amount would pay.

    (See Ch. 4 for more on this “means” test.)

    Reasons to Choose Chapter 7

    Because Chapter 7 is relatively fast and doesn’t require payments over time, most people who have a choice opt to file for Chapter 7 bankruptcy. You also don’t need to be current on your income tax filings (although you might run into a problem if the trustee believes that you’re not filing because you’re entitled to a significant tax refund). In the typical situation, a case is opened and closed within four months, and the filer emerges without debt except for a mortgage, car payments, and certain types of debts that survive bankruptcy (such as student loans, recent taxes, and back child support).

    If you have any secured debts, such as a mortgage or car note, Chapter 7 allows you to keep the collateral as long as you are current on your payments. However, if your equity in the collateral substantially exceeds the exemption available to you for that type of property—meaning that you have more equity than you’re allowed to protect in bankruptcy—the trustee can sell the property, pay off the loan, give you your exemption amount, and pay the remaining amount to your unsecured creditors. If you’re behind on your payments, the creditor can come into the bankruptcy court and ask the judge for permission to repossess the car (or other personal property) or foreclose on your mortgage. Or the lender can wait until the bankruptcy is over to recover the property.

    As a general rule, however, many Chapter 7 filers can keep all or most of their property, either because they don’t own much or because any equity they own is protected by an exemption. But this isn’t always the case—especially as the economy improves and home equity builds.

    Nevertheless, assuming you can qualify, discharge your debt, and protect your property, you’ll likely find it easier— and more effective—to file for Chapter 7 instead of paying into a long-term Chapter 13 plan.

    Reasons to Choose Chapter 13

    Each bankruptcy chapter solves different problems, which is why people who qualify for both types sometimes choose to file for Chapter 13 instead of Chapter 7.

    Chapter 13 bankruptcy makes sense for an income earner in any of the following situations (this isn’t an exclusive list):

    • You’re facing home foreclosure or car repossession and you want to keep your property. Using Chapter 13, you can make up the missed payments over time and keep the property. You cannot do this in Chapter 7 bankruptcy and would likely lose the property.
    • You owe more on vacation or investment property than the property is worth but would like to pay less to keep it. (Reducing the amount owed to the actual value is possible only if you aren’t using the real estate as your primary residence and you can afford to repay the entire reduced mortgage balance through your plan.) (See “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above.)
    • You have more than one mortgage and are facing foreclosure because you can’t make all the payments. If your home’s value is less than or equal to what you owe on your first mortgage, you can use Chapter 13 to change the additional mortgages into unsecured debts—which don’t have to be repaid in full—and lower your monthly payments. (See “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above.)
    • Your car is reliable and you want to keep it, but it’s worth far less than you owe. You can take advantage of Chapter 13 bankruptcy’s cramdown option (for cars purchased more than 2½ years before filing for bankruptcy) to keep the car by repaying its replacement value in equal payments over the life of your plan, rather than the full amount you owe on the contract. (See “Special Chapter 13 Features: Cramdowns and Lien Stripping,” above).
    • You have a codebtor who will be protected under your Chapter 13 plan but who would not be protected if you used Chapter 7 (the creditor won’t be able to collect against the codebtor while you’re in Chapter 13).
    • You have a tax obligation, support arrearages, or another debt that can’t be discharged in bankruptcy but can be paid off over time in a Chapter 13 plan (you can avoid a wage garnishment by paying in Chapter 13).
    • You owe debts that can be discharged in a Chapter 13 bankruptcy but not in a Chapter 7 bankruptcy. For instance, debts incurred to pay taxes can’t be discharged in Chapter 7 but can be discharged in Chapter 13.
    • You have a sole proprietorship business that you would have to close down in a Chapter 7 bankruptcy but that you could continue to operate in Chapter 13.
    • You have valuable personal property or real estate that you would lose in a Chapter 7 case but could keep if you file for Chapter 13 (you’ll need to have enough income to pay the unprotected value in the plan).

    Alternatives to Bankruptcy

    By now, you should have a pretty good idea about what you can hope to get out of a Chapter 13 bankruptcy. Before you decide whether a Chapter 13 or Chapter 7 bankruptcy is the right solution for your debt problems, however, you should consider some basic options outside of the bankruptcy system. Although bankruptcy is the only sensible remedy for some people with debt problems, an alternative course of action makes better sense for others. This section explores some of your other options.

    Do Nothing

    Surprisingly, the best approach for some people who are deeply in debt is to take no action at all. You can’t be thrown in jail for not paying your debts (with the exception of child support), and your creditors can’t collect money from you that you don’t have. If you don’t have income and property that a creditor could take, and you don’t foresee having any in the future, you’re likely considered “judgment proof.” Judgment-proof people rarely file for bankruptcy. Here’s why.

    Creditors Must Sue to Collect

    Except for taxing agencies and student loan creditors, creditors must sue you in court and get a money judgment before they can go after your income and property. The big exception to this general rule is that a creditor can take collateral—foreclose on a house or repossess a car, for example— when you default on a debt that’s secured by that collateral. (Although in some states, mortgage servicers must file a lawsuit to foreclose on your house.)

    Under the typical security agreement (a contract involving collateral), the creditor can repossess the property without first going to court. But the creditor will not be able to go after your other property and income for any “deficiency” (the difference between what you owe and what the repossessed property fetches at auction) without first going to court for a money judgment.

    To get a money judgment, a creditor must have you personally served with a summons and complaint. In most states, you’ll have 30 days to file a response in the court where you’re being sued. If you don’t respond, the creditor can obtain a default judgment and seek to collect it from your income and property. If you do respond— and you’re entitled to do so even if you think you owe the debt—the process will typically be set back several months until the court can schedule a trial where you can be heard. In most courts, you respond by filing a single document in which you deny everything in the creditor’s complaint (or, in some courts, admit or deny each of the allegations in the complaint).

    Also, some debtors wait until they’re served with a lawsuit. If that happens, the debtor files for bankruptcy promptly. The automatic stay stops the lawsuit in its tracks. If you take this approach, just be sure to act quickly—especially if the creditor accuses you of fraud. Because you can’t discharge a fraud judgment, you’ll want to file for bankruptcy before the court issues a judgment against you.

    Much of Your Property Is Protected

    Even if a creditor gets a money judgment against you, the creditor can’t take away essentials such as:

    • basic clothing
    • ordinary household furnishings
    • personal effects
    • food
    • Social Security or SSI payments necessary for your support
    • unemployment benefits
    • public assistance
    • bank accounts with direct deposits from government benefit programs, and
    • 75% of your wages (but more can be taken to pay child support judgments).

    The general state exemptions apply whether or not you file for bankruptcy (exemptions are explained in Ch. 4 and found online at Even creditors who get money judgments against you can’t take these protected items. (However, neither the federal bankruptcy exemptions nor the state bankruptcy-only exemptions available in California and a few other states apply if a creditor sues you in state civil court.)

    When You’re Judgment Proof

    A judgment is good only if the person who has it—the judgment creditor—can seize income or property from the debtor. For example, a judgment creditor can’t take anything if your only income is from Social Security (which can be seized only by the IRS and federal student loan creditors) and your property is exempt under your state’s exemption laws. Your life will continue as before, although one or more of your creditors might get pushy from time to time (creditors can still call and write letters asking for payment). While money judgments last a long time and can be renewed, this won’t make any difference unless your fortune changes for the better. If it’s likely, you might reconsider bankruptcy.

    If your creditors know that their chances of collecting judgments from you are slim, they probably won’t sue you in the first place. Instead, they’ll simply write off your debts and treat them as deductible business losses for income tax purposes. After some years have passed (usually between four and ten), the debt will become legally uncollectible under state laws known as “statutes of limitations.” A statute of limitation won’t help you if the creditor gets or renews its judgment within the time limit.

    Because lawsuits typically cost thousands of dollars in legal fees, a creditor that decides you don’t have enough assets to warrant going to court is unlikely to seek a judgment later. Because creditors are reluctant to throw good money after bad, your poor economic circumstances might shield you from trouble.

    You should take this with a grain of salt, however. Creditors have been known to change course and pursue more tenuous claims as the economy tightens. Before making your bankruptcy decision, it’s a good idea to research the current collection climate—especially if there’s reason to believe your financial situation is likely to improve. In such cases, it’s usually better to clean up the problem by filing for bankruptcy.

    Don’t restart the clock. A creditor has only a set amount of time under the relevant statute of limitations to sue you on a delinquent debt. It’s important to know that your actions can reset the statute of limitations and start it running all over again. For instance, you could inadvertently revive an old debt by admitting that you owe it or making a payment (the specifics vary by state). Savvy creditors aware of this loophole might try to trick you into reviving their ability to sue and collect the debt. So unless you want to make good on the debt, the best course of action is often to avoid all discussions with creditors.

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