Chapter 13

September 18th, 2008 by Reed Allmand

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. Chapter 13 is designed for individuals with regular income who want to pay their debts but are unable to do so in a timely manner. The purpose of Chapter 13 is to enable financially distressed individual debtors to propose and carry out a repayment plan under which creditors are paid over an extended period of time. During this time the law forbids creditors from starting or continuing collection efforts. After the commencement of a Chapter 13 proceeding, unless the bankruptcy court authorizes otherwise, a creditor may not seek to collect a consumer debt from any individual who is liable with the debtor such as a cosigner on a note. Consumer debts are those incurred for consumer, as opposed to business, needs. The Chapter 13 plan must, among other things, provide for the debtor to contribute that portion of his or her future income as is necessary to meet the terms of the plan.

Any individual, even if self-employed or operating an unincorporated business is eligible for Chapter 13 relief. Eligibility is contingent on the fact that the individual’s unsecured and secured debts are between certain dollar amounts that are adjusted annually by statute.

Upon the filing of the petition, an impartial trustee is appointed to administer the case. The primary role of the Chapter 13 trustee is to serve as a disbursing agent, collecting payments from debtors due under the plan and, in turn, distributing these payments to creditors.

Chapter 13 offers a number of advantages compared to chapter 7. A filing under this chapter offers an opportunity to stop foreclosure proceedings and may cure delinquent mortgage payments over time. You must however make all mortgage payments that come due during the chapter 13 plan on time. You can reschedule secured debts other than a mortgage for your primary residence and extend them over the life of your chapter 13 plan. Doing this may lower the payments. Chapter 13 also has a special provision that protects third parties who are liable with you on consumer debts. This provision may protect your co-signers. Chapter 13 acts like a consolidation loan under which you make the plan payments to a chapter 13 trustee who then distributes payments to creditors. You will have no direct contact with creditors while under chapter 13 protection.