Chapter 13 Bankruptcy

A chapter 13 bankruptcy which is called a plan for the wage earner enables people earning income regularly to formulate a plan for payment of a part or all of their debts. By virtue of this chapter, the debtor can develop a plan for repayment in installments over the next three to five years. This chapter 13 enables the debtor to retain ownership of his property and pay off the debts by paying in installments over a period of five years or less.

Under the Bankruptcy Code, if the debtor has a monthly income which is less than the median set by the state, then the developed repayment plan will be for only three years unless the court specifically provides repayment to be done for a longer period. The court may advise a longer period if it is convinced of the reasons put forward by the debtor. On the contrary, if the debtor's monthly income is in excess of the median stipulated by the state, then the repayment period of the debts will be for five years. In no case can the period of repayment be more than five years [11 U.S.C. § 1322(d)]. During the period of repayment, it is mandatory that no efforts be made towards the collection of the debts owed by the debtor.

There are advantages of the applicability of chapter 13 proceedings as compared to the liquidation proceedings under chapter 7. The significant advantage of a chapter 13 proceedings is that the debtor is able to keep ownership of his home and no foreclosure can be ordered. This procedure helps the debtor to clear his dues over a period of time without any foreclosure proceedings being initiated against the debtor, though it is required that all future debt payments must be made on time. 

Another advantage of this proceedings is that it provides for the debtor to be able to change his repayment plan as long as the repayments stay under the period of the plan. The debtor may even opt to lower the repayment amounts. This proceeding also has a provision for the protection of third parties whose liability falls under “consumer debts” and extends this protection to co-signers also. The chapter 13 bankruptcy is a consolidated loan wherein the debtor pays the installment to a court trustee who in turn distributes this amount to the individual creditors. The individual debtors will not come directly in contact with the creditors as long as the chapter 13 proceedings are in progress.

Unless otherwise ordered by the court regarding an extension, the debtor must submit a plan for repayment of his debts within a period of fourteen days after filing of the petition [Fed. R. Banker. P. 3015]. This plan will call for regular payment of a specific amount to the trustee who will distribute to all the creditors. These payments need to be done either on a monthly or bi-weekly basis.