Chapter 13

This page contains general information. Contact a WBG attorney for specific advice.

Congress divided the bankruptcy law into separate chapters. Chapter 13 provides for a reorganization of debt for individuals (not entities) with regular income. Chapter 13 debtors repay a portion of their debts by making payments to a trustee. After the debtor makes all of the required payments and complies with other requirements of Chapter 13, the court grants a discharge of debt.

Chapter 13 bankruptcy:

  • is more complex than Chapter 7,
  • extends for three to five years, in contrast to a Chapter 7, which typically takes about four months, and
  • costs more than Chapter 7, in both legal fees and payments to the trustee.

So why would anyone choose Chapter 13 instead of a Chapter 7? There are three main reasons:

  • The debtor doesn’t qualify for Chapter 7 relief because of a discharge received in a previous bankruptcy too recently,
  • The debtor doesn’t qualify for Chapter 7 relief because he can’t rebut the presumption of abuse under the means test, or
  • A foreclosure has been filed because of missed payments and the debtor wants to keep her house.

Eligibility

To qualify for Chapter 13 relief, individuals must have (1) regular income sufficient to fund a payment plan, (2) less than $383,175 in unsecured debt, and (3) less than $1,149,525 in secured debt. The debt limits apply only to noncontingent, liquidated debts. Your attorney can tell you if your debts fall into those categories. Entities (LLC, S-Corp, etc.) cannot file Chapter 13.

Preparation

Debtors can – and sometimes do – file bankruptcies quite quickly. However, it is best to file only after careful consideration because that gives you and your attorney the time to:

Prepare the bankruptcy petition and schedules. As part of a bankruptcy you must give a complete disclosure of your financial affairs. This means filling out long and complicated forms. The more time you have to fill out these forms the greater the chances that you will list everything required. And, if you do that, you greatly reduce the chances of an unpleasant surprise after you file your bankruptcy.

Prepare the Chapter 13 plan. A Chapter 13 plan must provide for payment in full to certain creditors and may have to provide for a minimum dividend to unsecured creditors. All of your available income (after deductions for taxes and allowed living expenses) must be devoted to the plan. If the available income is not sufficient to make the required payments, you’ll have to cut expenses, surrender assets, or consider filing Chapter 7 instead.

Act strategically. Depending upon your circumstances you may benefit by postponing your bankruptcy to, for example, reduce the chances of creditors contesting your bankruptcy.

Protect assets. You can only exempt a certain amount of property in a bankruptcy. If you have assets you can’t exempt and you have enough time you may be able to rearrange your affairs to your maximum advantage. Otherwise, you can either surrender the non-exempt assets to the trustee or keep them and pay the value of the unexempt portion to the trustee over the life of the plan.

The Plan

A Chapter 13 plan of reorganization modifies the rights of your creditors. You have a lot of flexibility in a Chapter 13 plan. As long as it complies with the Bankruptcy Code, the plan may propose to catch up on past due mortgage payments over time, pay a lower interest rate to creditors with liens on your vehicle, pay income tax debts over time without incurring additional interest, and more.

The biggest advantage is often stopping a home foreclosure. If you’re $10,000 behind on your mortgage payments and the lender has started a foreclosure proceeding, a Chapter 13 could allow you to pay back that $10,000 over time. You would have to start making your regular mortgage payments in addition to the Chapter 13 plan payments, so it’s not an inexpensive option. But if you can afford to cure the arrearage over 3 to 5 years then Chapter 13 is a great way to rescue your home from foreclosure.

Although it’s done via an adversary proceeding and not through the plan, Chapter 13 may also let you “strip off” a second mortgage from your home. If successful, you may emerge from bankruptcy with only one mortgage on your house instead of two.

Filing

Before filing a bankruptcy you must take a brief credit counseling course.

Bankruptcy begins with the filing of a petition and the financial disclosure paperwork discussed above. You file these documents with the clerk of court. Wisconsin clerks’ offices are located in Eau Claire, Madison, and Milwaukee.

You must also file the prepared plan of reorganization and provide additional documents to the trustee.

Automatic stay

The bankruptcy filing creates an injunction called an automatic stay. The automatic stay stops almost all collection activity. The Chapter 13 stay extends to certain co-signers, stopping collection from them during the case. However, creditors may collect from co-debtors once the stay terminates.

Trustee meeting

A month or so after you file your bankruptcy you will meet with a trustee in Eau Claire, Green Bay, Kenosha, La Crosse, Madison, Milwaukee, Oshkosh, Superior, or Wausau. The trustee will swear you in and ask you questions about your debts, assets, and related matters. The trustee will also ask if you believe your plan is feasible and if you feel you can afford the payments. Creditors may appear and ask questions as well; however, they seldom do.

If the trustee is satisfied that your plan is feasible and that it complies with the bankruptcy law, he or she will recommend that your plan be confirmed by the bankruptcy judge. If the trustee has any issues with your plan, he or she will object to confirmation.

Plan confirmation

Wisconsin bankruptcy judges handle the confirmation process differently. Some will confirm the plan without a hearing if there are no objections. Others will hold a hearing even if there are no objections. The time between the trustee meeting and confirmation of your plan will vary by judge as well. In the Western District of Wisconsin, the order confirming the plan may be entered within a week of the meeting if there are no objections. In the Eastern District of Wisconsin, plans are usually confirmed 60-90 days after the meeting. If you retain experienced bankruptcy counsel, your lawyer will know what to expect from your judge.

Discharge

Once your plan has been confirmed, your main responsibility is making all of your plan payments to the trustee. This is fairly easy if you have a wage assignment set up and the payments come directly out of your paychecks. If any issues come up during the 3-5 years of your plan, let your attorney know immediately so he or she can help you resolve it.

The trustee will take your payments and use those funds to pay creditors according to the terms of your plan. All priority and secured creditors will usually get paid in full before the unsecured creditors get anything.

After all your required payments have been made and you have complied with the other requirements of Chapter 13, the court will grant you a discharge. You won’t get a list of debts that were discharged, so ask your attorney for clarification if you’re not sure about a specific debt. In general, student loans, domestic support obligations, and some taxes will not be discharged.

This page contains general information. Contact a WBG attorney for specific advice.
Wisconsin Bankruptcy Guide is provided by law firms designated as Debt Relief Agencies by the federal government because we help people file for relief under the Bankruptcy Code. We also provide other types of debt relief options.

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