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 this chapter, debtors propose a repayment plan to make installments to creditors over three to five years. If the debtor’s current monthly income is less than the applicable state median, the plan will be for three years unless the court approves a longer period “for cause.”
If the debtor’s current monthly income is greater than the applicable state median, the bankruptcy plan generally must be for five years. In no case may a Chapter 13 plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.
There are many advantages a Chapter 13 has over a Chapter 7 liquidation bankruptcy. One big advantage is that a Chapter 13 allows individuals a chance to save and keep their homes when facing a 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 nice advantage of Chapter 13 over Chapter 7 is that individuals are allowed to reschedule secured payments (other than real property) and extend them for the life of the bankruptcy plan. This often lowers payments dramatically.
There is also a special provision in Chapter 13 bankruptcy which allows for protection of third parties who are liable with the debtor on consumer debts. This provision is often used to protect co-signers on loans made with the debtor. The Chapter 13 also acts like a consolidation loan where the individual makes plan payments to the Chapter 13 trustee who in turn distributes the payments to creditors. Individuals do not have to deal with creditors while in Chapter 13.
