Chapter 13 is a repayment plan for individuals with a regular source of income and some disposable income. Debtors choose Chapter 13 when:
- They have debts that are not dischargeable in a Chapter 7
- They are behind on car or house payments
- Their assets are not exempted
- They have a pending foreclosure
Chapter 13 bankruptcy protects the debtor from collection efforts. While a debtor is in a Chapter 13, creditors have to stop lawsuits, garnishments, repossessions and foreclosures.
A plan is worked out under which a debtor makes regular monthly payments to his or her creditors. At the end of the plan, any unpaid balances on dischargeable debts are discharged. The level of repayment varies from 1% to 100% depending on the debtor’s income, expenses and type of debt.
For example, the plan may provide for the repayment of a $12,000 credit card debt at 10% over a period of 60 months. That is, the debtor would pay $20 per month (1200 ÷ 60) toward that debt. At the end of the plan, the balance of $10,800 is discharged. (There are some dollar limits for total unsecured and secured debt.)
Under Chapter 13, the debtor is permitted to keep all of his or her property. He or she makes regular payments to a Chapter 13 Trustee, who then pays the creditors over the period of the plan. The plan usually runs for a term of three to five years.
An important and frequent use of Chapter 13 is to stop a home foreclosure and repossession. Often a mortgage company says to a debtor “Pay all the months you have missed or we will foreclose on (take) your home.”
Chapter 13 allows a debtor to, in effect, say: “I will restart my mortgage payment and pay you the arrears (the missed payments) in small payments over a period of three to five years.” If a foreclosure has been filed, it will be stopped by the filing of the Chapter 13.