Sometimes referred to as a wage-earner’s plan, a Chapter 13 repays a portion or all of your debts through a repayment plan approved by the Bankruptcy Court. Creditors generally are prohibited from collecting debts directly from the debtor. Instead of paying your creditors directly, you pay a certain amount every month (your disposable income) to the Chapter 13 Trustee, and the Trustee distributes the money to the creditors, as provided in the Chapter 13 plan. When the last payment is made, the debtor is no longer liable for the remainder of his or her dischargeable debts. Any individual, even if self-employed or operating an unincorporated business, is eligible for chapter 13 relief as long as the individual’s unsecured debts are less than $360,475 and secured debts are less than $1,081,400.
A trustee is appointed and will collect the payments from the petitioner, pay your creditors, and make sure you live up to the terms of the repayment plan.
A Chapter 13 plan lasts for three to five years unless the debtor can pay off all debts in less time. The length of your plan depends on how much you earn and how much you owe. If your average gross monthly income during the six months prior to the date of filing for bankruptcy is higher than the median monthly income allowed, you must propose a five-year plan. However, if your income comes out to be lower than median, the debtor can propose a three year plan. If you have a plan in which you agree to pay all your debts, then the day you repay all your debts in full, the plan will end, irrespective of whether or not you have reached the three or five-year mark.
For more information about filing a Chapter 13 bankruptcy, please visit our Chapter 13 FAQ page.