What Happens to Debt When You File Chapter 13?

When you file a Chapter 13 bankruptcy, your debts are frozen by a court order, reorganized by category, and folded into a single monthly payment that runs for three to five years. Secured debts like mortgages and car loans are handled one way, priority debts like child support and recent taxes another, and most leftover unsecured balances are discharged once you finish the plan. Here is what happens to each type of debt from the day you file to the day the case closes.

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. Collection calls, foreclosure proceedings, and repossessions all have to halt. The stay stays in place for the life of your case unless a specific creditor convinces the court to lift it for a specific debt.

Chapter 13 also protects people who co-signed your consumer debts. Under 11 U.S.C. § 1301, creditors generally cannot pursue a co-signer on a personal loan, co-signed car note, or similar consumer obligation while your 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 actually the one who received the benefit of the loan. The co-debtor stay covers consumer debts only, not business obligations.

Secured Debts: Mortgages, Car Loans, and Other Collateral

Secured debts are those backed by collateral. They get special treatment because the creditor holds a lien on specific property. The plan has to deal with the creditor’s interest in that collateral while giving you a path to keep it.

Catching Up on Mortgage Arrears

Saving a home from foreclosure is one of the most common reasons people file Chapter 13. The plan lets you cure the missed mortgage payments that triggered foreclosure by spreading those arrears across the three-to-five-year plan period.³ While you’re catching up on the back payments through the plan, you also have to stay current on your regular monthly mortgage going forward. As long as both obligations are met, the lender cannot foreclose. The plan cannot change the terms of your primary mortgage itself, though. The interest rate, remaining balance, and monthly payment all stay the same.

Reducing a Car Loan 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, when the collateral is worth less than the loan balance, the court splits the debt into two pieces: a secured portion equal to the property’s current value, and an unsecured portion for the rest.⁴ You pay the secured portion through the plan at a court-approved interest rate, and the leftover unsecured balance joins your other unsecured debts, where it may receive only pennies on the dollar.

If your car is worth $10,000 but you owe $18,000, you would pay $10,000 through the plan plus interest. The remaining $8,000 becomes unsecured debt.⁵

There is a timing limit. If you bought the car for personal use and the loan was taken out within 910 days (roughly two and a half years) before filing, no cramdown is available.⁶ You have to pay the full loan balance regardless of what the car is now worth. For other personal property securing a debt, the cutoff is one year instead of 910 days.

Stripping an Underwater Second Mortgage

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 that 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).⁴ Once reclassified, it gets whatever pro-rata share your plan pays unsecured creditors, and any remaining balance is wiped out when you finish. The lien is removed from your title after you complete the plan. If any equity sits above the first mortgage, even a dollar, lien stripping is not available.

Priority Debts That Have to Be Paid in Full

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

Domestic support obligations. Child support and alimony owed as of the filing date are first-priority claims. Every dollar owed has to be accounted for in the plan.⁷
Recent income taxes. Taxes for returns due within the last three years, or assessed within the last 240 days, hold priority status and also have to be paid in full through the plan.⁷

If your plan does not provide for full payment of priority debts, the court will not confirm it. These obligations are paid before general unsecured creditors see anything.

Filing does not pause your ongoing tax obligations either. You have to continue filing all required federal and state returns on time throughout the plan. If you miss a return and do not fix it within 90 days of a taxing authority’s request, the court must dismiss or convert the case.⁸

General Unsecured Debts: Credit Cards, Medical Bills, Personal Loans

General unsecured debts sit at the bottom of the priority ladder. These creditors receive whatever disposable income remains after secured and priority debts are addressed. In practice, that often works out to a small fraction of what’s owed, sometimes as little as ten cents on the dollar, sometimes less.

The real payoff comes at the end. Once you complete all plan payments, the court grants a discharge under 11 U.S.C. § 1328(a), which permanently eliminates your personal liability for any remaining balances on these general unsecured debts.⁹ Creditors are legally barred from trying to collect the unpaid portions. Before the discharge issues, you have to complete a financial management course from an approved provider and file the certificate with the court.

Debts That Survive the Discharge

Not every debt gets wiped out. Several categories remain your responsibility even after a successful Chapter 13:

Long-term secured debts. If your mortgage extends past the end of the plan, as most do, you resume regular payments on the original terms after the case closes. The plan only cured the arrears; the underlying loan continues.⁹
Student loans. These remain enforceable unless you file a separate lawsuit within your bankruptcy case and prove that repayment would be 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.⁹
Drunk-driving injury debts. Debts for personal injury or death caused by operating a vehicle while intoxicated are permanently excluded.
Certain older or fraud-related taxes. Tax obligations that did not qualify as priority claims, such as very old taxes or taxes tied to a fraudulent return, may still survive depending on the specifics.

What Happens If You Cannot Finish the Plan

A three-to-five-year payment schedule is a long commitment, and life does not always cooperate. There are three main paths if you fall behind.

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 to the five-year maximum, or reduce what unsecured creditors receive, so long as it still meets the legal requirements for confirmation.

Dismissal or Conversion to Chapter 7

If modification is not enough, the case can be dismissed or converted to Chapter 7. You can voluntarily do either at any time. Creditors or the trustee can also ask the court to dismiss or convert for cause, including missed plan payments, unfiled tax returns, or falling behind on post-petition support.¹⁰ Dismissal ends bankruptcy protection; the automatic stay drops and creditors can resume collection where they left off. Conversion to Chapter 7 means nonexempt assets could be liquidated to pay creditors.

Hardship Discharge

In rare cases, the court can grant a hardship discharge even without full plan completion. You have to 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 in a Chapter 7 liquidation, and modifying the plan is not workable.¹¹ A hardship discharge covers fewer debts than a standard Chapter 13 discharge, so some obligations that a completed plan would have erased may survive.

Taking On New Debt 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. Additional borrowing could jeopardize your ability to finish the plan.¹² Running up unauthorized debt during the case can lead to dismissal.

The Chapter 13 filing itself stays on your credit report for up to 10 years from the date the case is filed.¹³ Rebuilding takes time, but completing the plan shows future lenders you followed through on a structured repayment, which some view more favorably than a Chapter 7 liquidation.

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