In a Chapter 13 bankruptcy, you attempt to repay your creditors instead of wiping out your debts without paying. You propose a repayment plan to make payments to creditors over 3-5 years.
If your current monthly income is less than the state median income for the same household size, the plan will be for 3 years. If your current monthly income is more than the state median, the plan will be for 5 years.
The Illinois median family income for household size can be found on the US Trustee's website.
A judge reviews the repayment plan, and decides whether to approve it. If the plan is approved, payments are made to the trustee, who then pays the creditors who file a proof of claim. A proof of claim will list the kind of debt and the amount of the debt. You can keep some property that you would have lost if you filed a Chapter 7 bankruptcy.
In a Chapter 13 bankruptcy, you must pay your creditors in full if you can. If that is not possible, you must pay all of your disposable income for 3-5 years. Disposable income is the income left over after paying necessary living expenses.
Once the repayment plan is completed, you will get a discharge of their debts. You must pay certain back taxes, and any obligations in child support and maintenance in full during the plan. Also, some types of debts will not be wiped out.
It is very important to speak with a lawyer if possible before filing for Chapter 13 bankruptcy because creating a repayment plan is a very hard thing to do.
You can file for Chapter 13 bankruptcy as long as your:
- Unsecured debts are less than $383,175
- Secured debts are less than $1,149,525
You cannot file for Chapter 13 bankruptcy if, during the 180 days before filing a new bankruptcy, a prior bankruptcy was dismissed because:
- You failed to follow a court order; or
- You requested a dismissal.
Also, within 180 days before filing bankruptcy, you must receive credit counseling from an approved credit counseling agency. A list of federally approved credit counseling agencies can be found on the US Trustee's website.
What to consider before filing for bankruptcy
Filing for bankruptcy is not a good idea for everyone. It is a serious step, and you should only file for bankruptcy if you know it will help you. You should talk to a lawyer before filing if possible.
Reasons to file:
- Debts can be discharged (wiped out), giving you a fresh start;
- Bankruptcy stops wage garnishment and harassment by collection agencies;
- Foreclosures and repossessions are stopped and cannot move forward unless the court allows;
- You can keep exempt property;
- You can stop utility shutoffs, or restore service after paying a reasonable deposit, then pay only for current service;
- Employers and public agencies cannot retaliate against you for filing bankruptcy; and
- If your driver's license was suspended for not paying a debt that is dischargeable in bankruptcy, you can get your license reinstated.
Reasons against filing:
- Some debts, like student loans, might not be discharged (wiped out);
- Bankruptcy stays on your credit rating for 7 to 10 years;
- Getting credit may be harder or more expensive;
- It can cause strain in relationships with some creditors and cosigners;
- You may have to return property that is not paid for (Chapter 13 can be used to save some additional property); and
- You may be able to protect your income and property without filing bankruptcy.
Filing for bankruptcy will not help you if you are collection proof. You are collection proof if all of the following are true:
- You have no income, your take home pay from work is below $371.25 a week, or your income is only from a protected source like public benefits, child support or Social Security.
- You do not own a home, or own one with less than $15,000 in equity. Equity is the difference between how much is owed on the mortgage and how much the house is worth right now.
- You do not own a car, or own one with less than $2,400 in equity.
- You do not have personal property, including money in bank accounts, worth more than $4,000.
If you are collection proof, you do not need bankruptcy to stop debt collectors from contacting you. You can use our Letter from Collection Proof Debtor to ask the debt collectors to stop contacting you.
Property you can keep in a Chapter 13 bankruptcy
Debts that aren't canceled
A Chapter 13 bankruptcy does not cancel all forms of debt. A Chapter 13 bankruptcy won't cancel money owed for the following:
- Unpaid child support payments
- Unpaid maintenance or alimony payments
- Unpaid fines
- Student loans
- Most unpaid state and federal taxes
- Criminal restitution orders
- Debts due to fraud, theft or embezzlement
- Damages to another person caused by drunk driving or conduct done on purpose
- Debts from a property settlement in a divorce
- Some other types of debts