A Chapter 13 Bankruptcy is called a wage earner’s plan. Debtors with a regular income develop a plan to repay all or a part of their debts. The debtor files a proposed repayment plan to make installments to his/her creditors over 36 to 60 months. The plan length depends on the median income for the debtor’s household. A plan cannot exceed 60 months. During the length of the plan creditors cannot start or continue collection efforts.
One reason many debtors choose to file a Chapter 13 Bankruptcy is it offers the debtor an opportunity to save his/her home from foreclosure. The filing of the Bankruptcy stops the foreclosure. Under the debtor’s plan, the delinquent mortgage payments can be cured over time. However, the debtor must pay the regular mortgage payments each month during the bankruptcy case.
The debtor submits his/her proposed repayment plan to the Court. The Court must approve it, and the plan must provide for payments to the trustee on a regular monthly basis. The Chapter 13 panel trustee distributes the funds to the creditors according to the terms of the plan. Failure to make the required plan payments is cause for dismissal of the debtor’s case.
In order to receive payments from the trustee, creditors must file with the court a proof of claim. A proof of claim describes the type of claim a creditor has. Three types of claims exist. First, priority claims are granted special status by the Bankruptcy Code and includes such debts as taxes. Second, secured claims are those that give the creditor the right to foreclose or repossess a piece a property if the debtor does not pay the debt. An example is a car loan. Third, unsecured claims are the kind that creditors have no special rights to collect against a piece of property owned by the debtor. An example is a credit card debt.
The plan must deal with all types of debt. For a priority claim the plan must pay the entire debt unless the priority creditor agrees to a different treatment of the debt. For any collateral that is securing a claim, the plan must state if the collateral is being surrendered. If the debtor wants to keep the property, the plan must provide that the secured claim holder will receive at least the value of the property. Unsecured creditors need not be paid in full as long as the debtor is paying all of his/her projected disposable income over the applicable commitment period and as long as unsecured creditors receive at least as much as they would under a Chapter 7 case.
A confirmation hearing will be held to determine if the court can approve the proposed plan of the debtor. If the plan is confirmed, the trustee will distribute the funds to the creditors. The debtor must make regular payments to the trustee for the plan to succeed.
Upon completion of all plan payments, the debtor will receive a discharge. Generally, the discharge releases the debtor from all debts that were provided for in the plan or disallowed with some exceptions of certain debts. A fresh start is given to the debtor.