When Is Chapter 13 Bankruptcy Worth It?

Chapter 13 bankruptcy, formally “Adjustment of Debts of an Individual with Regular Income,” offers individuals with consistent income a structured way to manage overwhelming debt. Unlike other bankruptcy types that liquidate assets, Chapter 13 focuses on a repayment plan, allowing debtors to retain property while making manageable payments to creditors under court supervision.

Understanding Chapter 13 Eligibility

To qualify for Chapter 13 bankruptcy, an individual must meet specific federal criteria. A primary requirement is “regular income,” meaning income stable enough to fund a repayment plan. This can include wages, self-employment earnings, social security benefits, pensions, or disability payments.

Debt limits also apply. As of April 1, 2025, the unsecured debt limit is $526,700, and the secured debt limit is $1,580,125. Exceeding either threshold makes an individual ineligible.

Before filing, individuals must complete an approved credit counseling course from a U.S. Trustee Program-sanctioned agency within 180 days. All federal and state tax returns for the four years prior to filing must also have been submitted.

Prior bankruptcy filings affect discharge eligibility. A Chapter 13 discharge is generally not available if a Chapter 7 discharge was received within the preceding four years, or if a previous Chapter 13 discharge was granted within the preceding two years.

Developing the Chapter 13 Repayment Plan

The repayment plan is the core of Chapter 13 bankruptcy, detailing how the debtor will repay creditors over a set period. This outlines monthly payments from future income to a bankruptcy trustee. The plan’s duration is usually three or five years, depending on the debtor’s income relative to their state’s median income for their household size. Plans are generally three years if income is below the median, and five years if income exceeds it.

The “means test” assesses an individual’s financial capacity to repay debts. This calculates the debtor’s current monthly income (CMI) by averaging income from all sources over the six months before filing. The CMI is compared to the state’s median income for a household of the same size. If the CMI is above the median, a detailed calculation determines “disposable income.”

Disposable income is the amount remaining after deducting allowed expenses from the CMI, using IRS national and local standards. This dictates the minimum amount the debtor must pay into the plan each month for unsecured creditors. The plan must commit all disposable income.

The plan must specify how secured, priority, and unsecured creditors will be paid. The debtor submits the proposed plan to the bankruptcy court. Creditors can object if it does not meet legal requirements. The court then holds a confirmation hearing. If it satisfies all statutory requirements, including the “best interests of creditors” test (ensuring unsecured creditors receive at least as much as in a Chapter 7 liquidation), the court confirms the plan.

A Chapter 13 trustee oversees the case, collecting monthly payments and distributing funds to creditors according to the confirmed plan. The trustee monitors compliance, including timely tax filings. If circumstances change, the debtor may modify the plan with court approval to adjust payment amounts or terms.

Treatment of Debts in Chapter 13

Chapter 13 bankruptcy structures the management of various debt types within the repayment plan.

Secured Debts

Secured debts, like home mortgages and car loans, can be addressed. The plan allows debtors to catch up on missed payments (arrears), preventing foreclosure or repossession. For certain car loans, if the vehicle was purchased over 910 days before filing, the debtor may “cram down” the loan balance to the vehicle’s current market value. The remaining balance is reclassified as unsecured debt, potentially reducing the principal and monthly payment. This generally does not apply to primary residence mortgages.

Priority Debts

Priority debts are unsecured obligations that receive preferential treatment and must generally be paid in full through the plan. These include recent income taxes (due within three years of filing), past-due child support, and alimony. Administrative expenses, such as trustee and attorney fees, are also priority debts. The plan must ensure these are paid before general unsecured creditors receive distributions.

General Unsecured Debts

General unsecured debts, such as credit card balances, medical bills, and personal loans, are typically paid a percentage of the amount owed. This percentage is determined by the debtor’s disposable income and the “best interests of creditors” test, ensuring unsecured creditors receive at least as much as they would in a Chapter 7 liquidation. Often, only a small portion of these debts is repaid through the plan, with the remaining balance discharged upon completion.

Non-Dischargeable Debts

Certain debts are non-dischargeable, meaning they cannot be eliminated even after completing a Chapter 13 plan. Examples include most student loans (unless undue hardship is proven), debts for death or personal injury caused by driving while intoxicated, and debts incurred through fraud. While payments on these debts may be included in the plan, any remaining balance typically survives the bankruptcy. For co-signed debts, a “co-debtor stay” protects the co-signer from collection actions as long as the debtor remains current on plan payments.

Achieving Discharge and Completing the Plan

Successfully completing Chapter 13 bankruptcy culminates in the repayment plan’s completion and a discharge order. To reach this stage, the debtor must make all required payments as outlined in the confirmed plan over the three-to-five-year period. This includes payments to the trustee for distribution to creditors and any direct payments for ongoing obligations like current mortgage payments. The debtor must also complete a mandatory debtor education course after filing and before the final payment.

Upon successful completion of all plan payments and other requirements, the bankruptcy court issues a discharge order. This legal decree releases the debtor from personal liability for certain debts, meaning creditors can no longer pursue collection actions for those obligations.

The types of debts discharged in Chapter 13 are broader than in Chapter 7. Remaining unsecured debts, such as credit card balances, medical bills, and personal loans, are discharged if not paid in full through the plan. Certain older tax debts meeting specific criteria may also be discharged. Additionally, debts from property settlements in divorce or separation proceedings, and debts for willful and malicious injury to property, can be discharged in Chapter 13, which are typically non-dischargeable in Chapter 7.

Certain debts remain non-dischargeable. These include domestic support obligations like child support and alimony, most student loans, and debts for certain government fines or criminal restitution. While payments may have been made on these obligations during the plan, any outstanding balance generally persists post-discharge.

If a debtor cannot complete the repayment plan, consequences can arise. The case may be dismissed, lifting the automatic stay and allowing creditors to resume collection efforts. Alternatively, the case might be converted to a Chapter 7 liquidation bankruptcy if the debtor is eligible and the court deems it appropriate.