Chapter 13 is sometimes known as the “wage earner” or repayment plan bankruptcy.

You can think of Chapter 13 as a debt consolidation, where all debts are grouped together, and repaid to creditors over a three to five year installment payment plan supervised by the Chapter 13 Trustee’s Office and the Bankruptcy Court. The Chapter 13 must be filed in "good faith."

The main advantage of Chapter 13 is that non-exempt property is not liquidated. Chapter 13 permits people to keep any non-exempt assets. In Chapter 13, however, you are not completely discharging unsecured debt. For the privilege of keeping non-exempt assets you repay creditors a percentage on the dollar over a three to five year payment plan, established in accordance with the value of your assets and ability to pay.

Not everyone is permitted to file under Chapter 13. For instance, there is a debt ceiling, or limit to the amount of debt you can have. The debt ceiling is periodically adjusted to reflect inflationary concerns. Most typical consumer cases are usually well within the debt ceiling, and it is rare when someone has too much debt to qualify for Chapter 13.

The required Chapter 13 repayment plan must also be feasible. In other words, to be eligible you must have regular income such as wages, pensions, or self-employment income sufficient to fund the plan while still meeting your monthly living expenses.

Corporations cannot file under Chapter 13, and must use the more complex and expensive Chapter 11 bankruptcy to reorganize debt. A business proprietor that is not incorporated, however, can use Chapter 13, provided the debt ceiling and other provisions discussed here are being met.

The Chapter 13 Trustee acts as a disbursing agent by collecting your installment payments and distributing them to creditors according to the plan; but the trustee also represents the interest of the creditors, and is responsible for ensuring continued compliance with the plan during the three to five year repayment period.

All creditors may not be fully paid in Chapter 13. Unsecured creditors, in many cases, are paid only a small percentage on the dollar, and upon successful completion of the plan the remainder of the debt is discharged similar to Chapter 7. To determine how much unsecured creditors get paid in Chapter 13, the Bankruptcy Code provides two guidelines or “tests.” First, the “disposable income test” requires that you pledge all of your disposable income into the plan for at least three years. Second, under the “Chapter 7 test,” you must pay unsecured creditors the same amount over the life of the plan as they would have hypothetically received had your property been liquidated under Chapter 7. Put another way, your plan must pay unsecured creditors an amount equal to the value of your non-exempt property.

A Chapter 13 Plan must also take account of priority and secured debts. In every case, priority debts, such as taxes and support obligations, must be paid in full through the plan, and secured creditors are entitled to receive an amount at least equal to the value of their collateral. For instance, if a vehicle is worth $7,000, then the plan must propose to pay the secured lender up to that amount. Any amount still left owing above the secured value is treated as unsecured debt, and that portion of the claim will be repaid along with the other unsecured creditor claims.  Under the new laws taking effect on October 17, 2005, some secured creditors may be entitled to receive the full amount of what is owed to them through the plan depending on when the collateral was purchased.

In Chapter 13 you must attend a Section 341 Meeting of Creditors and Confirmation Hearing, which is held within 45 days of the filing. At the Section 341 Meeting the trustee reviews the plan with you and your attorney. Immediately after the 341 meeting, the Confirmation Hearing is conducted, where the plan is presented to a bankruptcy judge for his review. If there are no objections, and the plan meets the requirements of Chapter 13, then the judge will confirm the plan, which makes it binding upon creditors.

The first payment under the plan is due approximately 30 days after filing the petition. Thereafter, the payments must be made regularly under the terms of the plan. Debtors can make payments to the trustee themselves on a monthly basis, or for convenience, the payments can be deducted directly from wages via a wage assignment, which is similar to a garnishment, where your employer deducts and sends a portion of your wages to the Chapter 13 office each pay period.

Chapter 13 may have some other advantages aside from allowing people to retain otherwise non-exempt property. For instance, Chapter 13 is commonly used to save a home from foreclosure. Delinquent mortgage payments, back property taxes or missed car payments can be paid through the plan to stop foreclosure or repossession.

A plan which proposes to pay all mortgage arrears can “cure” a mortgage default by stopping the foreclosure, while forcing the mortgage lender to accept the missed payments over time through the plan. There must, however, be enough disposable income both to fund the plan, and to allow people to recommence making the current mortgage payments directly to the lender, starting with the next due date after the petition is filed.

 Also, your co-signors are protected if the co-signed debt is paid in full through the plan.