Chapter 13 bankruptcy is often referred to as a wage earner's bankruptcy, since it helps a person with a regular source of income to create a plan to repay their outstanding debts. For many individuals, Chapter 13 bankruptcy is an option if they make too much money to qualify for Chapter 7 bankruptcy, or if they are interested in working out a debt repayment plan rather than liquidating their assets to pay off their debts.
A Chapter 13 bankruptcy filing has a number of advantages over other types of bankruptcy filings; one of the main advantages is that the debtor is allowed to keep their property. In addition, the debt repayment process can be structured so as to take up to five years to pay off debt, so the payments should not present too much of a hardship.
Before an individual can file for Chapter 13 bankruptcy, they must attend a credit counseling session with an approved agency. If the debtor cannot afford the counseling fee charged by the agency, the agency must provide the counseling for free or reduced rates. After the counseling session, the debtor will receive a completion certificate to file with the bankruptcy court.
The first step in a chapter 13 bankruptcy consists of the debtor filing a petition with the bankruptcy court. The court will consider earnings and debt load to help construct a repayment plan; in some cases, the debt may be partially paid and then discharged. The court has the final say regarding the debt repayment plan, so even if a creditor disagrees with the repayment schedule, they must accept the court's decision. Creditors are prohibited by the terms of a Chapter 13 bankruptcy proceeding to collect additional claims from the debtor.
In some Chapter 13 bankruptcy cases, the court may appoint a trustee to disburse the payments to creditors as specified in the repayment plan. Certain debts are known as "priority debts;" these must be paid in full according to the plan. Examples of priority debts include alimony, child support, and some types of tax obligations. Other debts, including unsecured debts, can sometimes be discharged after being partially paid.
Repayment plans generally last between three and five years, at which point all remaining debts are discharged. Before the court will issue a discharge, however, the debtor must show that they are current with any alimony and/or child support payments.