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Chapter 13, is a repayment plan designed for an individual with a regular source of income that otherwise does not qualify for or want a chapter 7. Often the payment plan is considerably lower that if wages were garnished or regular credit card payments were made. Chapter 13 may be preferable to chapter 7 because it enables the debtor to keep a desirable asset, such as a house, and because it allows the debtor to propose a “plan” to repay creditors, sometimes as low as 10% of the debt, over time – usually 3 – 5 years.
Chapter 13 is also used by consumer debtors who do not qualify for chapter 7 relief under the means test. At a confirmation hearing, the court either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from chapter 7 since the chapter 13 debtor usually remains in possession of the property of the estate and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the life of the plan (3 – 5 years).
Unlike chapter 7, the debtor does not receive an immediate discharge of debts. The debtor must complete the payments required under the plan before the discharge is received. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under chapter 13 than the discharge under chapter 7.
Chapter 13 Background
A chapter 13 bankruptcy is also called a wage earner’s plan. It enables individuals with regular income to develop a plan to repay all or part of their debts. 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 plan generally must be for five years. In no case may a plan provide for payments over a period longer than five years.
Current Monthly Income
“Current Monthly Income” means the average monthly income received over the six calendar months before filing the bankruptcy case, including regular contributions to household expenses from non-debtors and including income from the debtor’s spouse if the petition is a joint petition. It does not including social security income or certain payments made because the debtor is the victim of certain crimes. During this time the law forbids creditors from starting or continuing collection efforts.
Advantages of Chapter 13
Chapter 13 Eligibility