Chapter 13 Bankruptcy in New York

Chapter 13 is a reorganization bankruptcy that lets you repay creditors on terms set by federal law — usually three to five years — and obtain a discharge of any remaining unsecured balance at the end. It is the right tool when Chapter 7 is not available, when you need to save a home from foreclosure, or when you have property you want to keep that a Chapter 7 trustee would otherwise sell.

When Chapter 13 Is the Right Chapter

We typically recommend Chapter 13 in four scenarios:

• You are behind on a mortgage and want to keep your home. Chapter 13 lets you cure the entire arrears through the plan, on a timeline of up to five years, while maintaining the regular monthly payment.
• You earn too much for Chapter 7. Filers who fail the means test on the income side cannot get a Chapter 7 discharge, but they can almost always file Chapter 13.
• You have non-exempt assets you want to protect. In Chapter 13 you keep everything — the trade-off is that unsecured creditors must receive at least what they would have received in a hypothetical Chapter 7.
• You have priority debts that cannot be discharged in Chapter 7. Recent taxes, child support arrears, and similar priority claims can be paid over the life of a Chapter 13 plan rather than collected all at once.

What a Chapter 13 Plan Does

A Chapter 13 plan is a written document, signed by the debtor and filed with the court, that proposes how creditors will be paid over a three-to-five-year period. The plan is funded by the debtor's monthly disposable income. The standing trustee distributes that monthly payment among creditors in priority order:

1. Trustee's commission and administrative claims.
2. Secured creditors. Mortgage arrears, car payments, and (in some cases) cramdown of secured claims to collateral value.
3. Priority unsecured creditors. Recent income taxes, domestic support arrears.
4. General unsecured creditors. Credit cards, medical bills, deficiency claims, judgments. These are paid pro rata from whatever remains. In many cases the unsecured pool receives a small percentage, sometimes near zero.

Saving a Home From Foreclosure

The single most common use of Chapter 13 in our office is stopping a foreclosure sale and curing the arrears. The mechanics:

• The petition is filed and the automatic stay attaches, halting the sale.
• The mortgage arrears (missed payments, attorney's fees, escrow shortfall) are folded into the Chapter 13 plan and paid over the life of the plan.
• You resume regular monthly mortgage payments going forward.
• At the end of the plan, the loan is current and the case discharges any remaining unsecured debt.

Lien-Stripping Wholly Unsecured Junior Mortgages

If your home is worth less than what you owe on the first mortgage, a wholly unsecured second mortgage or HELOC can be stripped off the property through Chapter 13. The junior lender is reclassified as an unsecured creditor, paid pro rata in the plan, and the lien is discharged at the end. This is one of the most powerful tools Chapter 13 offers New York homeowners.

Eligibility Limits

Chapter 13 is available only to individuals (and individuals with their spouses). Corporations and LLCs cannot file Chapter 13. There are also debt limits — as of the current statutory amounts, total non-contingent, liquidated unsecured debt and secured debt must each fall below the Chapter 13 ceilings. Filers whose debts exceed those ceilings file Chapter 11 instead.

You also need regular income sufficient to fund the plan. "Regular income" can include self-employment income, Social Security, pension payments, alimony, and similar streams — not just W-2 wages.

Confirmation

A Chapter 13 plan does not bind creditors until the bankruptcy judge confirms it. The plan must satisfy:

• The best-interests-of-creditors test. Unsecured creditors must receive at least what they would have received in Chapter 7.
• The disposable-income test. All projected disposable income during the plan period must be committed to plan payments.
• Feasibility. Income must reliably support the proposed payments.
• Good faith. The plan and the petition must be filed in good faith.

Trustees and creditors regularly object to plans for failing one or more of these tests. We have confirmed plans in dozens of contested situations, including objections to secured-claim treatment, valuation disputes, and best-interests challenges.

Three-Year vs Five-Year Plans

The "applicable commitment period" under 11 U.S.C. § 1325(b)(4) is three years for below-median-income debtors and five years for above-median debtors. The distinction is significant: a below-median filer can propose a thirty-six-month plan and discharge the unsecured balance even if creditors receive little or nothing. An above-median filer must commit to sixty months and devote all projected disposable income to plan payments during that period. We run the median-income comparison at the consultation so you know which track you fall on.

A debtor can voluntarily extend a three-year plan to as long as five years, which is sometimes useful when secured creditor arrears are large or when the debtor wants to reduce the monthly plan payment.

Cramdown of Car Loans

For most car loans, Chapter 13 allows a "cramdown" of the secured claim to the vehicle's fair market value. The portion of the loan above value is reclassified as unsecured and paid pro rata in the plan. The remaining secured portion is repaid through the plan at a court-determined interest rate (typically based on the prime rate plus a risk adjustment under the Till standard).

Cramdown is not available for car loans incurred within 910 days of filing for a vehicle acquired for personal use (the "910-day rule" under the hanging paragraph of § 1325(a)). Cramdown is also unavailable for purchase-money loans secured by other items of personal property incurred within one year of filing.

Treatment of Priority Debts

Priority unsecured claims under § 507 — principally recent income taxes, trust fund taxes, and domestic support arrears — must be paid in full through the plan. This is one of the most powerful uses of Chapter 13 for filers facing IRS or NYS DTF collection: a tax liability that would survive a Chapter 7 discharge is paid through the plan with no further interest or penalties accruing on most older liabilities, and at the end of the plan the priority component is paid in full and the remainder is discharged.

Recent property taxes, certain wages owed to former employees of a small business, and other priority claims receive the same treatment.

The Co-Debtor Stay

Chapter 13 extends a unique protection to non-filing co-debtors under § 1301. If a relative or friend co-signed a consumer debt, the co-debtor stay enjoins creditor collection efforts against the co-debtor for the duration of the plan, provided the underlying debt is consumer debt and the plan proposes to pay it in full. This protection is not available in Chapter 7.

Modifying the Plan

Life happens during the three-to-five-year plan period. Job losses, illness, divorce, and income changes are common. Section 1329 allows the debtor to modify the plan after confirmation to adjust payment amounts, extend the term up to the statutory maximum, or change the treatment of specific claims. In severe cases where modification cannot save the plan, the debtor may request a hardship discharge under § 1328(b) or convert the case to Chapter 7.

Why Chapter 13 Plans Fail

Roughly one-third of Chapter 13 plans nationwide fail to reach discharge. The most common reasons we see:

• Payments stop. Either the debtor loses income or the plan was too tight from the outset. Wage-deduction orders directing the employer to remit the plan payment to the trustee improve completion rates significantly.
• Post-petition tax problems. Failure to file or pay current-year taxes during the plan is a confirmable-objection ground in many districts.
• Missed mortgage payments after confirmation. Lenders can move for relief from the stay to resume foreclosure if regular monthly payments lapse post-confirmation.
• Inaccurate budgeting. Schedules I and J that understate expenses lead to a plan payment that cannot be sustained in real life.

Careful budgeting at the outset, conservative income projections, and prompt modification when circumstances change are the keys to a successful plan.

Discharge

At the end of a successfully completed Chapter 13 plan, the court issues a discharge of all remaining dischargeable unsecured debt under § 1328(a). The Chapter 13 discharge is slightly broader than the Chapter 7 discharge — certain debts dischargeable in Chapter 13 are not dischargeable in Chapter 7 (sometimes called "the Chapter 13 super-discharge"), though the scope has narrowed in recent years.

Frequently Asked Questions About Chapter 13

How much will I pay each month?

The plan payment is driven by your monthly disposable income — what is left after reasonable and necessary expenses. The number is computed from Schedules I and J for below-median filers and from the Chapter 13 means test (Form 122C) for above-median filers. We model the plan payment at the consultation so you know what to expect before you commit.

Can I file Chapter 13 if I am self-employed?

Yes. Regular income for Chapter 13 eligibility includes self-employment earnings. Self-employed Chapter 13 filers must, however, file accurate monthly or quarterly business operating reports with the trustee in many districts and must remain current on estimated tax payments.

Can I file again if I have filed before?

Yes, subject to timing rules. A discharge in a prior Chapter 7 bars a Chapter 13 discharge for four years from the prior filing date; a prior Chapter 13 bars a new Chapter 13 discharge for two years.

To discuss whether Chapter 13 fits your situation, call 212-233-1233. The initial consultation is free.