What Happens to Debt When You File Chapter 13?

When you file Chapter 13 bankruptcy, what happens to your debt is that it gets pulled into a single court-supervised repayment plan lasting three to five years. Collection stops immediately. You make one monthly payment to a trustee, who distributes it among your creditors according to a strict priority order set by federal law. Secured debts are paid or reduced to the value of the property backing them, priority debts like recent taxes and child support are paid in full, and whatever remains on general unsecured balances is wiped out when you complete the plan.

The treatment of each debt depends on what kind of debt it is. That is the key to understanding Chapter 13.

Collection Stops the Day You File

The moment your petition is filed, a federal court order called the automatic stay takes effect under 11 U.S.C. § 362.¹ Lawsuits pause. Wage garnishments stop. Foreclosure proceedings halt. Repossession is blocked. Collection calls end. The stay stays in place for the life of the case unless an individual creditor persuades the court to lift it.

Chapter 13 adds a protection Chapter 7 does not offer. Under 11 U.S.C. § 1301, creditors generally cannot pursue anyone who co-signed a consumer debt of yours while the case is active.² A creditor can ask the court to lift that protection if your plan does not propose to pay the co-signed debt, or if the co-signer was the one who actually received the benefit of the loan. The co-debtor stay covers consumer debts only, not business obligations.

The stay is weaker for repeat filers. If you had a bankruptcy case dismissed within the past year, the stay in your new case expires after 30 days unless you convince the court to extend it. If two or more of your cases were dismissed in the prior year, no stay takes effect at all unless you ask for one and prove good faith.³

What Happens to Secured Debts

Secured debts are those backed by collateral — a mortgage on your home, a loan on your car, a lien on furniture. Chapter 13 is often the tool people use specifically because of how it treats these debts.

Mortgage Arrears Get Spread Across the Plan

If you fell behind on your mortgage and foreclosure is looming, Chapter 13 lets you cure the arrears by paying them off gradually over the three-to-five-year plan.⁴ While you are catching up on the missed payments through the plan, you must also stay current on your regular monthly mortgage going forward. Meet both obligations and the lender cannot foreclose. What the plan cannot do is change the terms of your primary mortgage itself. The interest rate, remaining balance, and monthly payment stay the same.

Car Loans Can Be Reduced to the Vehicle’s Value

For most secured debts other than your primary mortgage, Chapter 13 allows a cramdown. Under 11 U.S.C. § 506, if the collateral is worth less than the loan balance, the court splits the debt in two: a secured portion equal to the property’s current value, and an unsecured portion for the rest.⁵ You pay the secured portion through the plan at a court-approved interest rate. The unsecured portion joins your other unsecured debts, where it may receive pennies on the dollar or nothing.

Example: your car is worth $10,000 but you owe $18,000. You pay $10,000 through the plan (plus interest), and the remaining $8,000 becomes unsecured debt.⁶

There is a catch. If you bought the car for personal use and took out the loan within 910 days (roughly two and a half years) before filing, cramdown is not available.⁷ You have to pay the full loan balance. For other personal property securing a debt, the cutoff is one year.

Junior Mortgages Can Be Stripped Off

If your home has a second mortgage or home equity line of credit that is entirely underwater — meaning your first mortgage balance alone exceeds the home’s market value — Chapter 13 lets you strip the junior lien. Because no equity supports the second lender’s claim, the court reclassifies it as unsecured debt under 11 U.S.C. § 506(a).⁵ That debt then receives only the pro-rata share your plan pays to unsecured creditors, and any remaining balance is discharged. The lien comes off the title after you complete the plan. If even a dollar of equity sits above the first mortgage, stripping is not available.

Priority Debts Get Paid in Full

Some unsecured debts are classified as priority claims under 11 U.S.C. § 507, and federal law requires your plan to pay them in full. No reduction. No partial discharge. The two most common categories:

Domestic support obligations. Child support and alimony owed as of the filing date are first-priority claims, and every dollar must be accounted for in the plan.⁸
Recent income taxes. Taxes meeting certain timing rules — generally taxes for returns due within the last three years or assessed within the last 240 days — hold priority status and must also be paid in full through the plan.⁸

If your plan does not provide for full payment of these debts, the court will not confirm it. Priority claims are paid ahead of general unsecured creditors.

Filing Chapter 13 does not pause tax obligations that come due after your case starts. You must keep filing all required federal and state returns on time throughout the plan. If you miss a return and do not correct the problem within 90 days of a taxing authority asking the court to act, the court must dismiss the case or convert it to Chapter 7.⁹

What Happens to Credit Cards, Medical Bills, and Other Unsecured Debts

General unsecured debts sit at the bottom of the priority ladder. Credit card balances, medical bills, personal loans, deficiency balances left over from cramdowns and lien strips, old utility bills, and similar obligations all share whatever disposable income remains after secured and priority claims are handled. In practice, unsecured creditors often receive only a fraction of what they are owed. Sometimes ten cents on the dollar. Sometimes less.

The payoff comes at the end. Once you complete every plan payment, the court grants a discharge under 11 U.S.C. § 1328(a) that permanently eliminates your personal liability for the unpaid balances on those general unsecured debts.¹⁰ Creditors are legally barred from ever trying to collect the leftover portions. Before the discharge issues, you must complete a financial management course from an approved provider and file the certificate with the court.

Debts That Survive Chapter 13

Not everything is wiped out at the end. Some debts remain your responsibility no matter how faithfully you complete the plan:

Long-term secured debts. If your mortgage extends past the plan — as most do — you resume regular payments on the original terms after the case closes. The plan only cures the arrears; the underlying mortgage continues.¹⁰
Student loans. These stay enforceable unless you file a separate lawsuit within your bankruptcy case and prove that repayment would impose an undue hardship, a standard that historically has been very difficult to meet.
Criminal restitution and fines. Debts included in a criminal sentence cannot be discharged.¹⁰
Drunk-driving injury debts. Debts for personal injury or death caused by operating a vehicle while intoxicated are permanently excluded from discharge.
Older or fraud-related tax debts. Tax obligations that did not qualify as priority claims may survive depending on the specific circumstances.

What If You Can’t Finish the Plan

Three to five years is a long stretch, and not every case makes it to the finish line. What happens to your debts then depends on which path the case takes.

Plan Modification

If your income drops or your expenses climb, you can ask the court to modify the plan. A modified plan might lower your monthly payment, stretch the timeline up to the five-year maximum, or reduce what unsecured creditors receive, provided the plan still meets the legal requirements for confirmation.

Dismissal or Conversion

When modification is not enough, the case may be dismissed or converted to Chapter 7. You can voluntarily dismiss or convert at any time. Creditors and the trustee can also ask the court to do so for cause, including missed plan payments, unfiled tax returns, or falling behind on post-petition support.¹¹ Dismissal ends all bankruptcy protection. The stay lifts and creditors can pick up collection where they left off. Conversion to Chapter 7 puts your nonexempt assets at risk of liquidation.

Hardship Discharge

In rare cases, the court can grant a discharge even though you did not complete every plan payment. To qualify, you must show three things: your failure to finish is due to circumstances beyond your control, unsecured creditors have already received at least as much as they would have gotten in a Chapter 7 liquidation, and modifying the plan is not workable.¹² A hardship discharge covers fewer debts than the standard Chapter 13 discharge, so some obligations that would otherwise have been eliminated may survive.

New Debt and Your Credit During the Plan

While the case is active, you generally cannot take on new debt — including car loans, credit cards, or personal loans — without the trustee’s approval, because additional borrowing could jeopardize your ability to complete the plan.¹³ Unauthorized borrowing can lead to dismissal.

A Chapter 13 filing appears on your credit report for up to 10 years from the date the case is filed.¹⁴ Once the discharge is granted, some creditors view a completed Chapter 13 more favorably than a Chapter 7 liquidation because you followed through on a structured repayment commitment rather than having the debts simply erased.

1
Office of the Law Revision Counsel. 11 USC 362 Automatic Stay
2
Office of the Law Revision Counsel. 11 U.S. Code 1301 – Stay of Action Against Codebtor
3
Office of the Law Revision Counsel. 11 U.S. Code 362 – Automatic Stay
4
Office of the Law Revision Counsel. 11 USC 1322 Contents of Plan
5
Office of the Law Revision Counsel. 11 U.S. Code 506 – Determination of Secured Status
6
Office of the Law Revision Counsel. 11 USC 1325 Confirmation of Plan
7
Office of the Law Revision Counsel. 11 U.S. Code 1325 – Confirmation of Plan
8
Office of the Law Revision Counsel. 11 USC 507 Priorities
9
Internal Revenue Service. Publication 908, Bankruptcy Tax Guide
10
Office of the Law Revision Counsel. 11 USC 1328 Discharge
11
Office of the Law Revision Counsel. 11 U.S. Code 1307 – Conversion or Dismissal
12
Office of the Law Revision Counsel. 11 U.S. Code 1328 – Discharge
13
United States Courts. Chapter 13 – Bankruptcy Basics
14
Consumer Financial Protection Bureau. How Long Does a Bankruptcy Appear on Credit Reports?