Chapter 13 bankruptcy, often referred to as a "wage earner's plan," is a type of bankruptcy that allows individuals with an income above the means test threshold to develop a plan to repay all or part of their debts. This form of bankruptcy is designed for those who have a steady source of income and can afford to pay back their creditors over time, but need some breathing room to reorganize their finances.

How Chapter 13 Bankruptcy Works

When you file for Chapter 13 bankruptcy, you propose a repayment plan to make installments to creditors over three to five years. If the court approves your plan, you'll make payments to a court-appointed trustee, who will then distribute the funds to your creditors. The goal is to pay back as much debt as possible while keeping your property and catching up on delinquent accounts.

Eligibility

To qualify for Chapter 13 bankruptcy, you must have a means tested income above the median income for your state, and your unsecured debts (like credit card bills or personal loans) must be less than $419,275.00 and your secured debts (like mortgages and car loans) must be less than $1,257,850. It's important to note these limits are subject to change, so it’s important to check the current thresholds.

The Filing Process

Filing for Chapter 13 bankruptcy involves several steps:

Credit Counseling: Prior to filing, you must complete a credit counseling course from an approved agency.
Filing the Petition: You’ll need to submit a bankruptcy petition along with detailed information about your finances, including income, expenses, assets, and debts.
Repayment Plan Proposal: You must propose a repayment plan outlining how you intend to pay back your debts over three to five years.
Confirmation Hearing: A judge will review your plan at a court hearing, where creditors can raise objections. If the judge approves, your plan goes into effect.

Repayment Plan

The length of your repayment plan will depend on your income. If your monthly income is less than the median income for a household of your size in your state, the plan will typically last three years. If your income is above the median, the plan will generally last five years. During this time, you must make regular payments to the trustee, who will distribute the funds to your creditors.

Benefits of Chapter 13 Bankruptcy

Chapter 13 bankruptcy offers several advantages:

Keep Your Property: Unlike Chapter 7 bankruptcy, which may require you to sell assets to pay off creditors, Chapter 13 allows you to keep your property as long as you adhere to your repayment plan.
Catch Up on Missed Payments: It provides an opportunity to catch up on missed mortgage or car loan payments, preventing foreclosure or repossession.
Protection from Creditors: Once you file, an automatic stay goes into effect, stopping most collection actions, including lawsuits, wage garnishments, and phone calls from creditors.
Consolidated Payments: Instead of dealing with multiple creditors, you make a single payment to the trustee, simplifying the process.

Life After Chapter 13 Bankruptcy

Completing a Chapter 13 repayment plan can provide a fresh financial start. Once you successfully make all your payments, any remaining eligible debts will be discharged. This means you are no longer legally required to pay them. However, it’s important to rebuild your credit and maintain good financial habits to avoid future financial difficulties.

The thoughts, opinions and musings of this blog are those of Peter Schneider, a consumer advocate attorney at Northwest Debt Resolution, LLC. They are just that, his thoughts, opinions and musings and should be treated as such. They are not legal advice. If you have more questions or would just like to discuss your potential case, please contact me for a consultation.

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