CHAPTER 13
Chapter 13 Bankruptcy: The Wage Earner’s Plan for Debt Reorganization and Asset Retention
Chapter 13 bankruptcy, often called the “wage earner’s plan” or a “reorganization bankruptcy,” is a debt relief option available to individuals (including those operating as sole proprietors) with a regular, stable source of income. Unlike Chapter 7, which involves liquidation, Chapter 13 focuses on the debtor developing and completing a court-approved Repayment Plan to address their debts over a fixed period, typically to save a home or other valued assets.
The primary goal of Chapter 13 is to allow debtors to catch up on missed secured payments, modify certain loan terms, and eventually discharge most remaining unsecured debt while retaining their property.
Eligibility and Debt Limits for Chapter 13
To qualify for Chapter 13, a debtor must meet several strict statutory requirements:
Regular Income: The debtor must demonstrate a regular and stable income sufficient to fund the proposed repayment plan.
Debt Ceilings: The debtor’s total debt must be below certain statutory limits, which are adjusted periodically (typically every three years).
Secured Debt Limit: The amount of secured debt (e.g., mortgages, car loans) must not exceed the current statutory cap (e.g., approximately $\$1,395,875$ as of April 1, 2025).
Unsecured Debt Limit: The amount of unsecured debt (e.g., credit cards, medical bills) must also not exceed the current statutory cap (e.g., approximately $\$465,275$ as of April 1, 2025).
Means Test Application: Although Chapter 13 does not have the same automatic failure rule as Chapter 7, the Means Test is still used to determine the minimum length of the repayment plan and the minimum amount of debt that must be paid to unsecured creditors.
The Chapter 13 Repayment Plan: Core of the Process
The entire Chapter 13 case revolves around the creation, approval, and completion of the Repayment Plan:
Plan Duration: The plan typically lasts three years if the debtor’s income is below the state median, or five years if the debtor’s income is at or above the state median. Five years is the maximum duration allowed.
Prioritization of Debt: The plan must categorize and prioritize payments:
Secured Debts: The plan facilitates the payment of mortgage arrears, car loans, and other secured obligations. This is often the primary motivation for filing, as the plan stops foreclosure/repossession and gives the debtor time to catch up.
Priority Debts: These (e.g., recent tax liabilities, child support, and alimony) must be paid in full through the plan.
Unsecured Debts: General unsecured debts (credit cards, medical bills) are paid with the debtor’s “disposable income.” The amount paid can range from $0 \%$ to $100 \%$ depending on the debtor’s income, expenses, and asset values.
Best Interests of Creditors Test: The plan must ensure that unsecured creditors receive at least as much as they would have if the debtor had filed for Chapter 7 liquidation (the non-exempt asset value).
Key Benefits of Chapter 13 Bankruptcy
| Benefit | Description |
| Asset Retention | Debtors keep all of their property—exempt and non-exempt—provided they fund the plan based on their disposable income and asset values. |
| Foreclosure/Repossession Halt | The Automatic Stay provides immediate protection, stopping foreclosure sales, enabling the debtor to cure mortgage arrears through the plan. |
| “Cram Down” Power | Debtors can, under certain conditions, reduce the principal balance of secured loans on personal property (like cars) to the property’s current market value, provided the loan is old enough (often 910 days or older). |
| Co-Debtor Stay | Chapter 13 provides protection for co-signers on consumer debts, preventing creditors from pursuing the co-debtor while the plan is active. |
| Superdischarge | Chapter 13 can discharge certain debts that are not dischargeable under Chapter 7, such as non-fraudulent property settlements in a divorce (not alimony/child support). |
The Role of the Standing Trustee
In Chapter 13, a court-appointed Standing Trustee plays a central, active role throughout the process:
Administration: The trustee receives the debtor’s single monthly payment.
Disbursement: The trustee distributes those funds to creditors according to the court-approved plan.
Oversight: The trustee monitors the debtor’s financial performance and may object to the plan if it is not feasible or does not comply with the bankruptcy code.
Confirmation: The plan is only legally binding after the judge grants an order of Confirmation at the confirmation hearing.
Upon the successful completion of all payments, typically after 3-5 years, the debtor receives a discharge of all remaining qualifying debt, achieving a fresh financial start with their assets intact.
Next Step: Would you like to know the current secured and unsecured debt limits for Chapter 13 eligibility in the United States?
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