The chapter of the Bankruptcy Code providing for adjustment of debts of an individual with regular income is known as Chapter 13 bankruptcy. Chapter 13 allows a debtor to keep property and pay debts over time, usually three to five years.
Chapter 13 is similar to a reorganization and is often called a wage-earner’s plan. In Chapter 13 the filer creates a plan detailing the repayment of some or all of their debt.
Under a Chapter 13 bankruptcy, the debtor proposes a repayment plan that calls for installment payments to creditors over three to five years. If the debtor’s current monthly income averaged over the last 6 months is less than the applicable state median, the Chapter 13 plan will be for three years unless the court approves a plan lasting longer.
When the debtor’s current monthly income averaged over the last six months is greater than the applicable state median, then the Chapter 13 Plan usually must last for five years. A Chapter 13 plan can never be proposed that lasts for longer than five years. During the time the case is active the law prohibits creditors from starting or continuing collection activity.
Chapter 13 offers individuals a number of advantages over liquidation under chapter 7 bankruptcy. Perhaps most significantly, chapter 13 bankruptcy offers individuals an opportunity to save their homes from foreclosure.
By filing a Chapter 13 bankruptcy an individual stops foreclosure proceedings, and can then make payments over the life of the plan that cure past-due delinquent payments. However, the Chapter 13 filer must still make the regular monthly mortgage payments while the Chapter 13 is active.
Another advantage Chapter 13 has over Chapter 7 is that secured debts (other than a home) can be crammed-down or rescheduled and extended over the life of the bankruptcy. This often means substantially lower monthly payments.
Chapter 13 also provides protection for third parties who are liable with the debtor on consumer debts. This means that co-signers on loans made with the debtor can be protected from creditor actions. The Chapter 13 Plan also acts like a consolidation loan where the debtor pays the Chapter 13 trustee who then disburses the money to creditors. Thus, filers of Chapter 13 never have contact with creditors.