Chapter 13 Bankruptcy in Houston

You are behind on your mortgage. The foreclosure sale is on the calendar. You have IRS debt you cannot pay. Chapter 13 can stop all of it on the day you file, and give you three to five years to put your finances back together.

Chapter 13 bankruptcy is a court-supervised debt reorganization for individuals with regular income who want to keep secured property, typically a home or car, and repay creditors over three to five years. North Star Law represents Houston debtors in Chapter 13 cases in the U.S. Bankruptcy Court for the Southern District of Texas, with particular focus on cases involving IRS tax debts, mortgage cures, and the discharge of priority and dischargeable taxes.

Key Takeaways

• Chapter 13 lets you keep secured property, your home, your car, by curing arrears through a 3-to-5-year repayment plan, instead of liquidating assets like Chapter 7.

• For cases filed between April 1, 2025 and March 31, 2028, the § 109(e) debt limits are $526,700 in noncontingent liquidated unsecured debt and $1,580,125 in noncontingent liquidated secured debt.

• The automatic stay under 11 U.S.C. § 362 stops foreclosures, repossessions, garnishments, and IRS levies the moment the petition is filed; the § 1301 co-debtor stay protects co-signers on consumer debts.

• Older income tax debts that satisfy the 3-2-240 rule under § 523(a)(1) are dischargeable in Chapter 13; trust fund recovery penalties under IRC § 6672 and recent priority taxes are not, but they can be paid through the plan.

Step 4: Plan Execution and Discharge

You make monthly payments to the Chapter 13 trustee for the duration of the plan. The trustee distributes those payments to creditors in the priority sequence the plan establishes. Mortgage arrears get cured. Priority IRS debt gets paid. Unsecured creditors receive whatever pro-rata share the plan provides. At the end of the commitment period, after all required payments have been made and you have completed the financial-management course required by § 111, the court enters a discharge order under § 1328. Remaining dischargeable debt, including older qualifying income taxes, is wiped out.

Step 1: Eligibility & Plan Strategy

We begin with a complete review of your situation: a list of every creditor, the secured and unsecured debt totals, the value of your home and other secured property, your monthly income and expenses, and the specific outcome you need, stopping a foreclosure sale, catching up on car payments, restructuring an IRS balance, or all of the above. We confirm § 109(e) eligibility, run the means test under § 707(b) and § 1325(b), and identify the plan structure that produces the best outcome for your situation.

Step 2: Petition, Plan, and Automatic Stay

On the day we file your petition, the automatic stay under § 362 takes effect immediately and stops virtually all collection activity, foreclosure sales, vehicle repossessions, wage garnishments, IRS levies, lawsuit prosecution, and creditor phone calls. We file the proposed Chapter 13 plan within 14 days under Federal Rule of Bankruptcy Procedure 3015, you begin making plan payments to the Chapter 13 trustee within 30 days, and the case moves toward the meeting of creditors (the § 341 meeting) and the confirmation hearing.

Step 3: Plan Confirmation

The court confirms a Chapter 13 plan that satisfies the requirements of § 1325, the plan is feasible, was proposed in good faith, pays priority claims in full, satisfies the best-interests-of-creditors test, and devotes all of the debtor's projected disposable income to unsecured creditors over the applicable commitment period (three or five years, depending on the means test). Confirmation is the central legal event in a Chapter 13 case. Once the plan is confirmed under § 1327, its terms bind every creditor, and you have a binding court order keeping creditors at bay so long as you perform under the plan.

The Automatic Stay Stops Collection on Day One.

Foreclosure sales, IRS levies, wage garnishments, repossessions, and creditor lawsuits all stop the moment the Chapter 13 petition is filed. North Star Law files emergency Chapter 13 cases when foreclosure or sale dates require immediate action.

Call (832) 384-4526 for a free consultation.

What Is Chapter 13 Bankruptcy?

Chapter 13 of the U.S. Bankruptcy Code is the reorganization chapter for individuals with regular income. It allows a debtor to keep all property, including non-exempt assets a Chapter 7 trustee would otherwise liquidate, by proposing a court-supervised plan that pays creditors over three to five years out of the debtor's future income. In exchange for completing the plan, the debtor receives a discharge of remaining qualifying debts at the end of the commitment period. It is sometimes called a wage-earner's plan, but the eligibility category is broader: anyone with regular income, wages, self-employment, Social Security, retirement, rental, support, or other steady cash flow, can be a Chapter 13 debtor.

Chapter 13 is the right choice when the debtor has assets worth keeping, secured arrears that need to be cured, priority debts that need a structured payment vehicle, or income too high to qualify for Chapter 7 under the means test. It is the wrong choice when the debtor has no significant assets, no secured arrears, no priority debt, and qualifies for Chapter 7, in which case Chapter 7 is faster and cheaper.

Who Qualifies for Chapter 13?

Eligibility for Chapter 13 is governed by 11 U.S.C. § 109(e). The statute imposes three core requirements. First, the debtor must be an individual, businesses cannot file Chapter 13. Second, the debtor must have regular income, meaning income sufficiently stable and reliable to fund a multi-year plan. Third, the debtor's noncontingent liquidated debts must fall within the § 109(e) debt limits.

For cases filed between April 1, 2025 and March 31, 2028, those limits are $526,700 in noncontingent liquidated unsecured debt and $1,580,125 in noncontingent liquidated secured debt. (The limits are adjusted every three years under § 104.) The CARES Act unified $2.75 million combined limit expired on June 21, 2024, returning Chapter 13 to the dual cap structure. Bills are pending in Congress to restore the unified higher limit, but as of this writing the dual caps apply. Contingent or unliquidated debts, for example, an unaccrued personal guarantee or a pending lawsuit with no judgment, do not count toward the § 109(e) limits.

What does "noncontingent and liquidated" mean?

A noncontingent debt is one where the obligation to pay is fixed, it is owed today, not subject to a future event.

A liquidated debt is one where the amount owed is fixed or readily calculable, not the subject of a pending dispute over how much.

An unaccrued personal guarantee is contingent until the principal defaults; it does not count toward eligibility limits.

A pending tort lawsuit with no judgment is unliquidated; it does not count.

An IRS balance assessed but unpaid is both noncontingent and liquidated; it does count.

Two additional gating requirements apply. The debtor must complete approved credit counseling within 180 days before filing under § 109(h) and must not have had a prior bankruptcy case dismissed within the previous 180 days under specified circumstances.

Chapter 7 vs. Chapter 13: Which Is Right for You?

The threshold question in nearly every consumer bankruptcy case is whether to file Chapter 7 or Chapter 13. The right answer depends on the debtor's income, assets, secured-debt status, priority debt exposure, and goals.

In practice, debtors with significant home equity at risk, mortgage arrears that need curing, IRS priority debt, recent unmanageable secured debt, or income above the Chapter 7 median are usually better off in Chapter 13. Debtors with no significant assets, no secured debt, no priority debt, and income at or below the median are usually better off in Chapter 7. The choice often turns on facts that take a careful interview to surface, which is why the initial eligibility analysis is the most important hour of the engagement.

How Does the Chapter 13 Plan Work?

The Chapter 13 plan is the central document in the case. It identifies every creditor, classifies each claim, specifies how each class will be paid, sets the commitment period, and identifies the source of the plan funding. Section 1322(a) sets the mandatory contents; § 1322(b) sets the optional ones; and § 1325 sets the confirmation standards the plan must meet.

Mandatory Plan Provisions Under § 1322(a)

The plan must (1) provide for the submission of all or such portion of future earnings or income to the trustee as is necessary for the execution of the plan, (2) provide for full payment of all priority claims (with limited exceptions), (3) provide the same treatment to each claim within a particular class, and (4) provide for full payment of all governmental unit debts (subject to specific exceptions). Priority IRS debts under § 507(a)(8), recent income taxes, trust fund taxes, and similar claims, must be paid in full through the plan.

Optional Plan Provisions Under § 1322(b)

The plan may, among other things, modify the rights of secured creditors (with the principal-residence exception of § 1322(b)(2)), cure default and reinstate the original loan terms on the principal residence, designate classes of unsecured claims, provide for the payment of post-petition consumer debts, vest property of the estate in the debtor or another entity, and contain any other provision not inconsistent with the Code. The cure-and-reinstate power under § 1322(b)(5) is the principal mechanism for saving a home from foreclosure.

Confirmation Standards Under § 1325

The plan must satisfy several standards before the court will confirm it. The plan must be feasible, the debtor must be able to perform under it. The plan must satisfy the best-interests-of-creditors test under § 1325(a)(4), unsecured creditors must receive at least as much as they would in a Chapter 7 liquidation. The plan must satisfy the disposable-income test under § 1325(b), all of the debtor's projected disposable income (as defined by the means test for above-median debtors) must be devoted to unsecured creditors over the commitment period. And the plan must be proposed in good faith under § 1325(a)(3), meaning honestly, with full disclosure, and without abuse.

How Are IRS and State Tax Debts Treated in Chapter 13?

Tax debts are one of the most strategically important categories in a Chapter 13 case, and they are often the single biggest reason a sophisticated debtor chooses Chapter 13 over Chapter 7. The treatment depends on the type of tax, the age of the assessment, and whether a return was filed.

The 3-2-240 Rule for Dischargeable Income Taxes

Income taxes can be discharged in Chapter 13 (and Chapter 7) if they satisfy three timing requirements collectively known as the 3-2-240 rule, codified primarily in § 523(a)(1)(A) and § 507(a)(8). First, the return must have been due (including extensions) more than three years before the bankruptcy petition. Second, the return must have been actually filed more than two years before the petition. Third, the assessment must be more than 240 days old. Each prong has tolling provisions for offers in compromise, prior bankruptcies, and collection due process hearings under § 507(a)(8)(A)(ii). When all three prongs are satisfied and the return is non-fraudulent, the tax is dischargeable. When even one prong fails, the tax survives the discharge.

Priority Taxes Paid Through the Plan

Priority taxes, taxes that fail the 3-2-240 rule and therefore qualify for priority treatment under § 507(a)(8), must be paid in full through the Chapter 13 plan, but interest stops accruing on the priority portion at the petition date. Penalty accruals likewise stop. The plan provides a structured, court-supervised vehicle for paying off recent IRS debt over five years, with no further interest, no further penalty, no levies, and no collection action, all while also resolving consumer debts. For debtors with material recent IRS balances, this is often the most powerful feature of Chapter 13.

Trust Fund Recovery Penalties

Trust fund recovery penalties (TFRPs) assessed against responsible persons under IRC § 6672 are excepted from discharge under § 523(a)(1)(A) and § 507(a)(8)(C). They are paid in full through the plan as priority debts, but never discharged regardless of age. The same general analysis applies to most state employment-tax responsible-person liabilities.

Attorney-CPA Advantage on Tax-in-Bankruptcy Cases.

Most bankruptcy attorneys do not analyze the 3-2-240 rule themselves, they refer the question out to a tax practitioner, or worse, file without analyzing it at all. North Star Law analyzes dischargeability in-house. The right filing date can mean the difference between paying $80,000 of IRS debt and discharging it entirely.

Call (832) 384-4526 for a free consultation.

What Is Lien Stripping in Chapter 13?

Lien stripping is the process by which a wholly unsecured junior lien on the debtor's principal residence is removed by court order in a Chapter 13 case. The seminal authority is 11 U.S.C. § 506(a) and (d), and the operative test is whether the senior liens against the property exceed the value of the property such that the junior lien has zero collateral value. If the second mortgage is wholly unsecured, for example, a $40,000 second on a $200,000 home with a $220,000 first, the second lien can be stripped and treated as unsecured in the plan, paid pro rata with credit cards, and ultimately discharged at the end of the case.

Chapter 13 lien stripping is generally not available in Chapter 7 after the Supreme Court's decision in Bank of America, N.A. v. Caulkett, 575 U.S. 790 (2015). The principal-residence-mortgage anti-modification provision of § 1322(b)(2) creates a parallel limitation in Chapter 13 itself: a partially secured first mortgage cannot be modified. But junior liens that are wholly unsecured, meaning zero collateral value supports them at the petition date, can be stripped under the rule established by Nobelman v. American Savings Bank, 508 U.S. 324 (1993), as applied in subsequent circuit decisions.

Lien stripping is one of the most powerful tools in Chapter 13 for debtors with second mortgages, HELOCs, or judicial liens against an underwater property. The valuation analysis is fact-intensive and often the principal contested issue in the case.

What Is the Co-Debtor Stay Under § 1301?

The co-debtor stay under § 1301 is a Chapter 13 protection that has no analog in Chapter 7. It bars creditors from collecting consumer debts from any individual who is liable with the debtor, or who secured the debtor's debt, typically a co-signer, guarantor, or family member who put up collateral. The stay applies for the duration of the Chapter 13 case, so long as the consumer debt is being paid through the plan or the creditor cannot demonstrate cause to lift the stay.

The co-debtor stay is most often invoked when a parent, spouse, or sibling has co-signed a car loan, a student loan (subject to dischargeability limits), or a personal loan. It is the principal reason many debtors choose Chapter 13 over Chapter 7 even when they could qualify for either, Chapter 7 leaves co-signers exposed to collection while the discharge proceeds; Chapter 13 protects them throughout the plan.

What This Means for You: When to File

Chapter 13 timing is often driven by external deadlines. A foreclosure sale on the calendar, a writ of execution from a state court judgment, an IRS levy notice, a vehicle repossession, any of these can be stopped by an emergency Chapter 13 filing if the petition is filed before the action is consummated. Once a foreclosure sale is conducted or a vehicle is repossessed, the procedural options narrow substantially. Filing one day late often means losing the asset entirely.

Beyond emergency timing, the strategic timing question for tax cases is the 3-2-240 analysis. Filing too early can mean missing the discharge window on a tax that would have been dischargeable a few months later. Filing too late can mean the case becomes harder for unrelated reasons, a deteriorating income stream, asset transfers that might be challenged, statute of limitations changes. The right filing date is usually a tax-and-bankruptcy analysis combined.

Common situations where Chapter 13 is the right tool:

You are behind on your mortgage and a foreclosure sale is scheduled or imminent.

You owe IRS or state income tax that you cannot pay in full and want a structured 5-year vehicle with no interest accruing on the priority portion.

Your income is above the Chapter 7 median and you do not pass the means test.

You have significant non-exempt assets, equity in a home, a second vehicle, a retirement that exceeds Texas exemptions, that a Chapter 7 trustee would liquidate.

A family member co-signed a consumer debt and you want to protect them while you reorganize.

Why North Star Law for Chapter 13?

Chapter 13 is the most analytically complex of the consumer bankruptcy chapters. Eligibility, the means test, plan design, the best-interests test, the disposable-income calculation, dischargeability of taxes under the 3-2-240 rule, lien stripping valuations, and co-debtor planning all interact. A poorly designed plan gets dismissed at confirmation. A poorly timed filing misses the dischargeability window. A poorly classified claim leaves the debtor paying for years on a debt that should have been wiped out.

Phillip Zagotti is a licensed attorney and Certified Public Accountant with over 20 years of experience. He is admitted to practice before the United States Bankruptcy Court for the Southern District of Texas (where Houston Chapter 13 cases are filed), the U.S. District Court for the Southern District of Texas, the U.S. Tax Court, the U.S. District Court for the Central District of California, the U.S. Bankruptcy Court for the Central District of California, and the State Bar of California. He holds a Texas CPA license. The dual qualification matters in Chapter 13 because most Chapter 13 cases involve at least some tax-debt analysis, and the difference between competent and excellent Chapter 13 representation often comes down to how the tax claims are handled.

Phillip is the co-author of Taxed: A Taxpayer's Guide to Tax Defense and Resolution. North Star Law represents Houston debtors in Chapter 13, Chapter 7, and Subchapter V cases, with particular focus on cases involving IRS or state tax liability.

Flat Fees. Court-Approved Pricing. Payment Plans Available.

Chapter 13 attorney's fees are reviewed and approved by the bankruptcy court under the Southern District of Texas no-look fee rules. We disclose the engagement fee structure in writing before filing. Most fees can be paid through the plan rather than upfront.

Call (832) 384-4526 for a free consultation.