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Chapter 13 is a part of the law in the United States that helps people who have a regular income and are struggling to pay their debts. It allows a person's earnings to be collected by a trustee and paid to creditors through a court-approved debt-repayment plan. This plan is sometimes called a wage-earner's plan or an income-based plan. The debtor can propose a plan to extend or reduce the balance of their obligations and receive a discharge from unsecured debts upon completion of the payments under the plan. If the plan is made in good faith and pledges all of the debtor's disposable income for three years, it will be confirmed. Chapter 13 helps people get back on track with their finances and pay off their debts over time.
Chapter 13 is a section of the United States Bankruptcy Code that allows individuals with a regular income to create a court-approved debt-repayment plan. This plan is sometimes called a wage-earner's plan or an income-based plan. The plan is administered by a trustee who collects the debtor's earnings and distributes them to creditors according to the plan.
Under Chapter 13, the debtor can propose a plan to extend or reduce the balance of their obligations and receive a discharge from unsecured debts upon completion of the payments under the plan. The plan must be made in good faith and must pledge all of the debtor's disposable income for three years. If the plan meets these requirements and creditors receive what they would have received under Chapter 7, it will be confirmed.
For example, if John has a regular income and owes $50,000 in unsecured debt, he may file for Chapter 13 bankruptcy. He proposes a plan to pay $500 per month for three years, totaling $18,000. The trustee collects John's earnings and distributes the payments to his creditors according to the plan. At the end of the three years, John receives a discharge from his remaining unsecured debt.
Another example is Sarah, who owns a small business and has a regular income. She owes $100,000 in debt, including $50,000 in unsecured debt. Sarah files for Chapter 13 bankruptcy and proposes a plan to pay $1,000 per month for five years, totaling $60,000. The trustee collects Sarah's earnings and distributes the payments to her creditors according to the plan. At the end of the five years, Sarah receives a discharge from her remaining unsecured debt.