Can You File Chapter 13 and Keep Your House?

Chapter 13 bankruptcy offers individuals a structured path to financial reorganization, allowing them to repay debts under court supervision. For homeowners facing financial distress, Chapter 13 can be a relevant tool, as it often allows individuals to prevent foreclosure and retain ownership of their homes. This form of bankruptcy focuses on a repayment plan, distinguishing it from liquidation bankruptcies.

Qualifying for Chapter 13

Eligibility for Chapter 13 bankruptcy requires a stable and regular income, which forms the foundation for the proposed repayment plan. The source of this income can vary, including wages, self-employment earnings, pension benefits, or disability payments, provided it is sufficiently reliable.

Individuals must also meet specific debt limits to qualify for Chapter 13, as outlined in the U.S. Bankruptcy Code, 11 U.S.C. § 109. As of April 1, 2025, total secured debt cannot exceed $1,580,125, and total unsecured debt cannot exceed $526,700. These figures are periodically adjusted for inflation, and exceeding either limit requires consideration of other bankruptcy chapters, such as Chapter 11.

Before filing for Chapter 13, prospective debtors are required to complete a credit counseling course from an approved agency. This counseling aims to explore alternatives to bankruptcy and provide financial management education. Additionally, restrictions exist based on prior bankruptcy filings, with waiting periods imposed before an individual can file for Chapter 13 after a previous Chapter 7 discharge or another Chapter 13 discharge.

How Chapter 13 Addresses Mortgage Debt

Upon filing a Chapter 13 petition, an automatic stay immediately goes into effect, as provided by 11 U.S.C. § 362. This legal injunction halts most collection activities, including foreclosure proceedings, offering immediate relief and time for the debtor to reorganize their financial affairs. The automatic stay prevents creditors from seizing assets, including a home, while the bankruptcy process unfolds.

A primary mechanism for homeowners to keep their property in Chapter 13 is the “cure and maintain” provision, found in 11 U.S.C. § 1322. This allows debtors to address mortgage arrearages by distributing them through the Chapter 13 repayment plan over its duration. Concurrently, the debtor must continue making all regular, ongoing mortgage payments as they become due outside of the plan. Successfully curing the default while maintaining current payments enables the homeowner to avoid foreclosure and retain their residence.

Chapter 13 also offers the possibility of “lien stripping” for certain junior mortgages or liens. This applies specifically to wholly unsecured junior liens, such as a second mortgage or home equity line of credit, where the home’s current market value is less than the outstanding balance of the first mortgage. If the junior lien is completely unsecured by any equity in the property, it can be reclassified as general unsecured debt within the Chapter 13 plan, as allowed by 11 U.S.C. § 506.

Reclassifying a wholly unsecured junior lien means it is no longer treated as a secured debt against the property but rather as an unsecured claim, similar to credit card debt or medical bills. These reclassified debts receive only a partial payment, or sometimes no payment at all, depending on the debtor’s disposable income and the plan’s terms, with any remaining balance discharged at the plan’s conclusion.

Property exemptions, particularly the homestead exemption, play an important role in protecting a debtor’s equity in their home, as outlined in 11 U.S.C. § 522. While specific exemption amounts vary, a portion of the home’s value is protected from creditors. This protection helps debtors retain their homes through Chapter 13.

Structuring Your Chapter 13 Repayment Plan

A Chapter 13 repayment plan is a formal proposal submitted to the bankruptcy court by the debtor, outlining how debts will be repaid over time, as specified in 11 U.S.C. § 1321. This plan consolidates various financial obligations into a single, manageable payment made to a bankruptcy trustee. The structure of this plan is important for the success of a Chapter 13 case, particularly for those seeking to protect their home.

The plan must address several categories of debt. Priority debts, such as certain tax obligations and domestic support obligations like child support or alimony, must be paid in full through the plan. The plan also details the method for curing mortgage arrearages by distributing these payments over the plan’s life. While ongoing mortgage payments are made directly by the debtor outside of the plan, the plan must account for these recurring obligations in the debtor’s budget.

Secured debts, including car loans or other loans collateralized by property, are also incorporated into the plan. The treatment of these debts can vary, sometimes involving reduced interest rates or extended payment periods. Unsecured non-priority debts, such as credit card balances and medical bills, are addressed based on the “best interest of creditors” test, which mandates that unsecured creditors receive at least as much as they would in a Chapter 7 liquidation, as per 11 U.S.C. § 1325.

The duration of a Chapter 13 plan is between three and five years, with the specific term often determined by the debtor’s income relative to the median income in their state. Debtors with income above the state median propose a five-year plan, while those below the median may opt for a three-year plan. The bankruptcy trustee, appointed under 11 U.S.C. § 1302, plays an important role in reviewing the proposed plan, collecting payments from the debtor, and distributing them to creditors.

Ultimately, the proposed plan must be feasible, meaning the debtor must demonstrate a realistic ability to make all required payments throughout the plan’s duration. This requires careful budgeting and a thorough assessment of the debtor’s income and expenses to ensure the plan is sustainable. The court will only confirm a plan if it determines it is proposed in good faith and is viable.

The Chapter 13 Process and Discharge

The Chapter 13 bankruptcy process begins with the filing of the petition and the proposed repayment plan with the bankruptcy court. This initial step triggers the automatic stay, providing immediate protection against creditors. Following the filing, the debtor provides necessary financial documentation and prepares for subsequent procedural steps.

A key procedural event is the “meeting of creditors,” also known as the 341 meeting, held about a month after filing, as described in 11 U.S.C. § 341. During this meeting, the debtor is placed under oath and questioned by the bankruptcy trustee and any attending creditors about their financial situation and the proposed plan. This meeting ensures transparency and allows for clarification of financial disclosures.

Following the meeting of creditors, a confirmation hearing is scheduled, where the bankruptcy judge determines whether to approve or reject the repayment plan. The judge assesses whether the plan meets all legal requirements, including feasibility and adherence to the “best interest of creditors” test. It is not uncommon for plans to require modifications based on objections from the trustee or creditors, or due to court requirements, before final confirmation.

Once the plan is confirmed, the debtor enters a period of strict adherence to its terms, making regular, scheduled payments to the Chapter 13 trustee for the entire 3-to-5-year duration. Simultaneously, the debtor must remain current on ongoing mortgage payments directly to their lender. Maintaining consistent payments to both the trustee and the mortgage holder is important, as failure to do so can lead to dismissal of the case. Circumstances can change during this multi-year period, and plan modifications are allowed if there is a significant change in the debtor’s income or expenses, as permitted by 11 U.S.C. § 1329.

Upon successful completion of all plan payments and compliance with other requirements, including completing a debtor education course, the debtor receives a discharge, as provided by 11 U.S.C. § 1328. This discharge legally releases the debtor from most remaining unsecured debts that were included in the plan. However, certain debts, such as ongoing mortgage obligations, some long-term debts, and specific non-dischargeable debts like most student loans and recent taxes, continue to remain the debtor’s responsibility.