What Makes Chapter 13 Bankruptcy a Bad Idea?

Bankruptcy laws exist to provide a fresh financial start for people whose debt has become unmanageable.

The debt may be from unforeseen circumstances, like medical bills or a job loss, or it may be from financial mismanagement, like overspending with credit cards. When it comes to bankruptcy, the reason for the debt doesn’t matter.

The two most common types of consumer bankruptcy in the U.S. are Chapter 7 and Chapter 13. Chapter 7 bankruptcy allows people to erase debts with an agreed-upon lump-sum payment, while they liquidate assets. Chapter 13 bankruptcy allows you to keep property, but you must follow a 3-5-year plan to repay debts.

If you are considering bankruptcy, you may be wondering which type is best for you. People choose Chapter 7 because it’s usually quicker (six months) and can eliminate unsecured debts like credit cards and medical bills. People choose Chapter 13 when they have secured debt – like a mortgage or auto loan – and don’t want to lose those assets.

Bankruptcy law may help you make the decision. To file Chapter 7, you must pass a means test that shows that you don’t have the income to pay your debt, even over time.

Most consumer bankruptcies (non-business) are Chapter 7. Of the 517,308 bankruptcies filed in 2024, about 485,000 were consumer bankruptcies. Of those, 59% were Chapter 7 and 41% Chapter 13.

If keeping your assets is a priority, Chapter 13 may seem like the best option. But the cons of Chapter 13 may change your mind. Of those who file Chapter 13, less than half successfully make it to the end of their plan. If your plan is dismissed, your creditors can once again seek payment, or worse, and accrued interest and fees can mean you owe more than you did before you filed.

» Learn more: What are the Consequences of Bankruptcy?

What is Chapter 13 Bankruptcy?

The pros and cons of Chapter 13 bankruptcy are directly tied to the financial situation and needs of the person who files. Its goal is reorganization of debt, and is called the “wage-earner’s plan,” since those who file are determined by the court to have enough income to pay their debts once a plan is in place.

Anyone with a regular income can file for Chapter 13, but to be eligible, you must not exceed a certain debt limit. For those who file between April 1, 2025, and March 31, 2028, unsecured debt must be less than $526,700, and secured debt must be less than $1,580,125. The court then determines if you have the income and assets to pay those debts under a reorganization plan.

A trustee appointed by the court administers the case, assessing the filer’s financial reports, making recommendations to the judge, and determining how debts will be paid. The plan that the trustee works out, and the court rules on, includes things like whether allowed expenses are reasonable, whether the creditors are seeing legitimate debt (rooting out possible error or fraud), and if payments are reasonable. A Chapter 13 trustee can decide whether to dismiss the case if the filer is having trouble paying or requires a modification or even seek immediate debt discharge.

Pros of filing Chapter 13 bankruptcy are:

• Automatic stay upon filing stops foreclosure proceedings on a home, a vehicle repossession, or other debt-related lawsuits.
• Payments go directly to the Chapter 13 trustee, who distributes them to creditors; no contact with creditors while under the plan.
• Plan can be modified if income or other circumstances change.
• Trustee can recommend debt be discharged for hardship if your circumstances change radically.
• Unsecured debt that’s left after the payment plan is completed is discharged.
• Some lawsuits, taxes, government fees and fines and property settlement debt can be discharged, unlike with Chapter 7.
• Chapter 13 bankruptcy remains on your credit report for seven years (Chapter 7 is on for 10 years).

That said, there are also cons of Channel 13 bankruptcy. Let’s take a look.

1. Chapter 13 Failure Rate

Most bankruptcy filers in Chapter 13 work out a five-year payment plan, but a lot can happen in five years. Of Chapter 13 cases that closed in 2024, only 49% were for successful plan completion. Of those dismissed, rather than successfully completed, 51% were because of nonpayment. (Other reasons are missing documents or court dates, not taking the required credit counseling course, and failing to meet other requirements).

Unexpected life events could range from medical bills to funeral costs to a car accident to children needing money for college to losing your job or your income decreasing. Bankruptcy law, though, understands that things happen. Chapter 13 allows plan modification if your circumstances change. Of the 97,063 Chapter 13 cases successfully completed in 2024, 24% were modified at least once since they were first filed.

If you successfully complete the plan, it doesn’t mean that all debts are gone. Any remaining unsecured debt is erased, but you still must pay other debts, including home mortgage, car loan, back alimony or child support, and federal student loans. Since you’ll still have debts, once you’ve completed a Chapter 13 bankruptcy plan, you have to re-assess where you are and what you can do about remaining obligations.

2. Chapter 13: High Fees & Costs

The most expensive cost of filing Chapter 13 bankruptcy is the attorney fee. You aren’t required to hire an attorney to file bankruptcy, but most agree that not hiring one is a bad idea. A very bad idea. A study by the American Bankruptcy Institute found that only 2% of Chapter 13 filers who filed pro se – meaning without an attorney – were successful. While hiring a reputable bankruptcy lawyer costs money, not hiring one may cost you a lot more in the long run. According to the U.S. Bankruptcy Court, only 6% of those filing for Chapter 13 do it without the help of an attorney. Among other things, the attorney can help you determine if you’re a better candidate for Chapter 7 than Chapter 13.

How much will Chapter 13 cost?  There is a $315 court fee to file for Chapter 13 bankruptcy, which is less than the $335 it costs to file Chapter 7, but that’s where the savings stop.

An attorney will generally cost anywhere from $2,500 to more than $6,000 (the average is usually $3,000-$4,000). There are also fees for things like documents and required credit counseling and financial education courses. A Chapter 13 bankruptcy will cost you about $3,000-$5,000 total, on average. The more complicated the case is, the more expensive it is. You usually have to pay the filing fee up front, but the court can rule that you can pay it over time. Your attorney fees will be rolled into your monthly payment.

You will also pay the Chapter 13 trustee. It’s a full-time job and as much as 10% of the monthly payment is the trustee’s fee.

3. Chapter 13 Bankruptcy is Bad for Your Finances

If you’re one of the 51% who filed for Chapter 13, but your case was dismissed before you completed the court-required plan, your creditors can come back to ask for what you owe them, including garnishing your income and foreclosing on your property.

You could even owe more than you did when you started if your case is dismissed early in the process. Court and attorney fees are considered a priority, and your trustee pays those first. Secured debt comes next, followed by unsecured debt. Interest will still be accumulating on the second two categories, increasing the balances.

Whether you complete the five-year plan or not, Chapter 13 bankruptcy stays on your credit report for seven years. Your credit score will decrease by 100-200 points and take a while to recover. If your debts are returned because your case was dismissed, that will be another hit to your credit report.

4. Chapter 13: 50% Worse for Black Debtors

The numbers do not paint an equitable picture for the outcomes for Black consumers who file for Chapter 13 bankruptcy. The National Bureau for Economic Research, in a study published in 2025, found that cases by non-white Chapter 13 filers are 22% more likely to be dismissed unconditionally for nonpayment, rather than modified or have debt discharged outright. The number is highest for Black consumers, followed by Hispanic.

The study also found that Black consumers are more likely to file for Chapter 13. The study said 46.1% of Black consumers who filed for bankruptcy filed Chapter 13, as opposed to 23% of white bankruptcy filers. The study found that Black consumers were more likely to file Chapter 13 for reasons that included they couldn’t afford the up-front Chapter 7 fees, had secured vehicle debt and were concerned about losing their car, and that their secured debt in general was higher than unsecured debt.

The race of the judge and trustee was also found to play a part in how a Chapter 13 case is handled. Trustees have a lot of discretion when assessing debts and expenses, and also in how to handle payment issues. White trustees, as well as judges, were found to be more flexible with options other than dismissal with white filers. The study points out that this may not be intentional, citing multiple studies that show people have race bias they aren’t aware of, unfairly assigning attributes such as dishonesty, or lack the ability to follow a new payment plan. More than 90% of Chapter 13 bankruptcy judges, and 84% of Chapter 13 trustees, are white.

5. You Don’t Get to Keep Assets If You Fail

The idea of keeping your home, car and other personal belongings is an attractive part of Chapter 13. But if your case is dismissed, those assets are no longer protected. Since fewer than half of Chapter 13 cases make it to completion, it’s something to keep in mind.

One of the big benefits of Chapter 13 is the automatic stay, which is in effect as long as your plan is. An automatic stay means that the bank can’t foreclose on your home, or the auto dealer can’t repossess your vehicle. Any secured debt is protected. If the trustee determines that your plan should be dismissed, the automatic stay is lifted.

Secured loans like homes and vehicles are a lesser priority than court and attorney’s fees. That means that if you’re not far into your plan, the trustee may not have started making payments on secured debt. Interest will still accrue, despite the automatic stay. That means you’ll owe more money, which you have to pay immediately if your plan is no longer in effect. Your home can be foreclosed, your car can be repossessed, if you can’t catch up immediately, and start making on-time payments.

It’s important to understand, too, that the automatic stay that protects your house and other assets, like your car, doesn’t go into effect until you’ve filed Chapter 13. In many states, if the lender files to foreclose or repossess your car before you officially file with the court, the automatic stay doesn’t stop those proceedings.

A ProPublica study illustrated how assets can be affected, telling of a Memphis woman who earned $9 an hour, and whose expenses included rent, $19,000 in student loans, and a $1,100 balance on a car loan. When her work hours were cut, she filed Chapter 13 to keep up with her bills. A miscommunication with her attorney caused her case to be dismissed less than six months after she filed. The money she’d paid the trustee for the six months on the plan went to her attorney and court fees, not her car debt. Interest on her car loan accrued, and she owed more than she did when she filed. Collections agencies started contacting her soon after the dismissal, and her car was in danger of being repossessed. She couldn’t afford to lose her car – she needed it to get to work – but she also couldn’t afford to pay what she owed on it. She was considering filing for bankruptcy again in order to keep it.

6. No Money Down, But Less Chance of Success

Because Chapter 13 attorney fees are paid over time as part of the monthly payment, it’s sometimes referred to as “no money down” bankruptcy. Don’t file for Chapter 13 just because it seems cheaper at the front end, because you’ll end up paying a lot more in the long run.

You are required to pay the $315 filing fee upon filing unless the court agrees to an installment plan. If you do installments – four is the maximum – they must be paid within 120 days and are rolled into your monthly payment.

The attorney fees are also rolled into your monthly payment, and considered a priority claim, so they, along with any unpaid court fees and admissible taxes you owe, are paid before anything else. If your Chapter 13 is dismissed while the trustee is still paying the attorney and court fees, that’s money you still owe.

With Chapter 7, attorneys usually charge a flat fee, rather than the hourly fee an attorney would charge for a Chapter 13. That means the fees are generally $2,000 lower. Even though you’re paying up front, you’re paying less and you’re more likely to have a successful outcome.

7. Low Chances of Chapter 13 Success Offers No Improvement to Budgeting Skills

It seems logical that the Chapter 13 bankruptcy will force people to develop a budget and stick to it. The court-ordered payment will not change for the agreed-on timeframe – usually five years – unless it’s modified. That means you can work it into a budget without it changing. In many cases, it’s also payroll deducted, which means that creating a household budget is necessary in order to accommodate the lower paycheck.

You are required to take a credit counseling course before filing for bankruptcy and a debtor education course after filing. If you want to be successful with a Chapter 13 bankruptcy, take the courses to heart, learn their lessons, and be a proactive budgeter and a stickler for financial responsibility.

8. Chapter 13 Bankruptcy May Not Get Your License Back

Many states suspend drivers’ licenses for unpaid parking and traffic tickets. Residents of certain cities are finding they are increasingly overwhelmed with debt from late fees and other penalties from traffic violations. Drivers are scrambling to get the money together to pay what they owe, but in the meantime, the cost just keeps multiplying.

With Chapter 13, it’s possible in some states to discharge traffic ticket debt and get your license back, unlike with Chapter 7. If you plan to file bankruptcy to do it, though, be sure you read the fine print first, including municipal and state law. If traffic tickets and violations are considered civil penalties, not criminal ones, they can be discharged with Chapter 13 bankruptcy in most states. Be sure, though, that you can make payments on a Chapter 13 plan. If you can’t, you’ll still owe the ticket money, as well as the cost of filing for an unsuccessful Chapter 13 bankruptcy.

This all came to a head in Chicago several years ago, when the city increased traffic violation fees in order to increase revenue. An unexpected result was a huge increase in ticket debt by residents who needed their cars to get around, and a jump in Chapter 13 filings related to that debt. ProPublica and WBEZ Chicago, in a series of reports, found that less than 25% of those who filed bankruptcy to pay their traffic debt to the city completed their bankruptcy. The rest were dismissed, with financial issues far greater than those they had to begin with.

9. Chapter 13 Fees

Chapter 13 fees and costs are rolled into your repayment plan, and they’ll add thousands to what you already owe. Chapter 13 bankruptcy costs include:

• Attorney fees range from $2,500 to more than $6,000, depending on how complex the case is and where you live.
• $315 filing fee, payable upon filing, or in installments rolled into your monthly payment.
• Credit counseling, required before filing, $10-$50.
• Debtor education course, required after filing, $10-$50.
• Chapter 13 trustee fee of up to 10% of your monthly payment.

Alternatives to Chapter 13 Bankruptcy

Everyone’s financial situation is different, and the reasons for filing for bankruptcy and what led to it are unique to each individual. But whatever the situation, bankruptcy should be a last resort when dealing with debt. If you’re considering it, there are serious questions to address. Should I file Chapter 13? Is Chapter 13 worth it? Is Chapter 13 a bad idea?

To answer those questions, you not only need to know what Chapter 13 involves but also understand the other options.

Some alternatives to Chapter 13 bankruptcy include:

Chapter 7 Bankruptcy

Consider filing Chapter 7 bankruptcy instead of Chapter 13. It’s simpler and easier. If you qualify, it’s almost certain to result in a successful discharge. It’s also faster. In 2024, the median time a Chapter 7 case took from filing to discharge was 110 days, about three-four months.

If you are worried about keeping your house, you may claim exemptions to property and belongings that are essential to your life, and most people who file Chapter 7 keep their house if it’s their primary residence, as well as their car. You must continue to make payments, of course. But in general, there are ways with Chapter 7 to settle debts and keep what you need.

The success rate is high as well. Debts were discharged in 99% of 2024 Chapter 7 bankruptcies that were filed correctly and not dismissed because the debtor didn’t pass the means test, missed deadlines or documents, or converted to Chapter 13.

The first meeting with an attorney, called a consult, is typically free. It’s wise to go over the options with bankruptcy then. Since it’s more straightforward and less up to the discretion of the trustee, the NBER study found that the Chapter 7 process and outcomes are also much more equitable for non-white consumers. You may find Chapter 7 is an easier and faster process.

Debt Management Program

Debt management programs are administered by nonprofit credit counseling agencies. They allow you to repay debt without filing bankruptcy. The counseling agency works with creditors on lowering interest and fees, and you pay a set monthly fee in a 3-5-year plan that works within your budget. You make the payment to the agency, and they pay your creditors.

Debt management programs address unsecured debt – credit cards, personal loans, and medical bills. It’s not a loan or debt settlement, but a way to have a manageable monthly payment and eliminate debt.

Debt Consolidation

Debt consolidation focuses on credit card debt, and combines separate accounts into one, at a lower interest rate. Instead of making several payments inflated by hefty credit card interest rates, one payment is made to one source. It can be done with a loan, which also has the advantage of a finite end period (unlike credit cards). Consolidation can also be done with a balance transfer card that has a promotional 0% interest rate. If you do it with the balance transfer card, be sure that you pay off the balance before the promotional period ends.

Debt Settlement

You can do debt settlement yourself, negotiating with your creditors and getting them to agree to pay less than the amount owed. You can also pay a for-profit debt settlement company to do it for you. The company will charge a fee, and both options will have a negative credit impact because your credit report will show you did not pay the full amount owed. You will also have to pay income tax on the amount forgiven if it’s more than $600.

Debt settlement works best with credit card debt. It doesn’t apply to debt that can’t be negotiated, like secured debt, or student loan debt. If student loan debt is the issue, talk to a professional to sort out the options.

Credit Counseling

Sometimes sitting down and talking to a professional can help sort through the maze of debt and finances. One type of professional who can help is a nonprofit counselor. Credit counseling is designed to help people avoid bankruptcy.

A counselor at a nonprofit credit counseling agency can offer advice on budgeting, managing money and other important basics of personal finance. They can also help sort out debt, and can offer their best solution (consolidation, settlement, etc.) to the individual situation.