Chapter 13 bankruptcy is a powerful tool for people with regular income who can pay back some of their debts. Chapter 13 allows you to "reorganize" your debts to pay back some completely and some partially while receiving protection from the bankruptcy court.
Chapter 13 is only available for people who have less than $465,275 in unsecured debts for cases filed between April 1, 2022, and March 31, 2025.
Unsecured debt doesn't have property or an asset serving as collateral. For example, if you don't pay most credit card debts, medical bills, utility bills, lawyer's fees, and rent, the lender can't take back the property you purchased on credit.
Before an unsecured creditor can take drastic collection actions, the lender must first go to court and get a money judgment against you. A lender with a money judgment can take money out of your bank account with a bank levy or out of your paycheck using wage garnishment. The lender could even seize property. But protections exist. Most states use the same exemptions used in bankruptcy to limit the amount a creditor can take from you.
To qualify for Chapter 13 bankruptcy, you must have less than $1,395,875 in secured debt for cases filed between April 1, 2022, and March 31, 2025. It's more likely that a Chapter 13 debtor will have a problem with the secured debt limit than the limit on unsecured debt, and here's why.
A secured debt is attached to property serving as collateral. The lender can take the property if the debtor "defaults" or doesn't pay on the loan. The two most familiar types of secured debt are real estate mortgages and car loans. A secured lender you don't pay could foreclose on a house or other real estate or repossess a vehicle.
While $1,395,875 might seem like a lot, a person, family, or a sole proprietor who owns more than one piece of property could easily have mortgages exceeding that threshold. For instance, a single, middle-class family home could have a mortgage that size in expensive real estate markets like San Francisco, Hawaii, Manhattan, Boston, or Northern New Jersey. Learn about protecting houses in bankruptcy.
Keep in mind that other types of creditors can have 'liens' on your property, which is important because it's the lien that creates a secured debt. Credit purchases for jewelry, furnishings, mattresses, appliances, and electronics are common examples. Some lenders create a secured debt by putting a lien on your property when you owe taxes or student debt or when you don't pay for home repairs.
Although filers can remove some liens in bankruptcy, many remain. You can start to find out what happens to liens in bankruptcy by reading about lien avoidance in bankruptcy and judgment liens in bankruptcy.
Updated April 23, 2022