What is Chapter 13 Bankruptcy?

Chapter 13 bankruptcy is often referred to as a “wage-earner” bankruptcy.   Many similar concepts apply in Chapter 13 as they do in Chapter 7.  For example, upon the filing of a Chapter 13 case, an estate is created.  The debtor in Chapter 13 bankruptcy can claim exemptions under applicable law in property.  In a Chapter 13, you must develop a plan to pay all or  a portion of your debts with your disposable income over time, typically from three (3) to five (5) years.  Instead of a trustee selling assets to pay debts, such as in Chapter 7, the Chapter 13 trustee collects your payments and you, the debtor, remain in control of your assets (but you must account for your non-exempt assets in your Chapter 13 plan, among other things).

Not everybody qualifies to  file a Chapter 13 case.  You must meet certain debt limitations; in other words, you cannot have in excess of certain dollar amounts of secured and unsecured debts.

There are many requirements related to the Chapter 13 plan process. The Chapter 13 plan has to meet the “best interest of creditors” test, among other requirements.  Creditors need to receive at least as much as they would have in a Chapter 7 case in order for your plan to be confirmed.  The amount of disposable income used to fund your plan is based on your “means test” figures or your actual monthly income and expense figures, depending upon the circumstances of your case.  In some instances, if you owe certain types of tax debt or certain property settlement obligations arising out of a divorce, or have a wholly unsecured junior lien on your home, filing a Chapter 13 may be preferable to filing a Chapter 7 case, even though the process takes longer.