Legal Definitions - Chapter 13 plan

A Chapter 13 plan is a repayment proposal filed by an individual with regular income in a Chapter 13 bankruptcy case. It details how the debtor will make installment payments from their future income over three to five years to a trustee, who then distributes funds to creditors, allowing the debtor to retain assets and ultimately discharge many debts upon successful completion.

A Chapter 13 plan is a structured proposal for repaying debts, created by an individual with a consistent income under Chapter 13 of the United States Bankruptcy Code. Unlike Chapter 7 bankruptcy, which often involves selling assets to pay creditors, a Chapter 13 plan allows debtors to keep their property, such as a home or car, while committing a portion of their future earnings to repay their debts over a period of three to five years. The exact duration typically depends on the debtor's income compared to their state's median income.

The debtor is responsible for proposing this detailed plan, outlining a schedule of regular payments to a court-appointed trustee. This trustee then collects the payments and distributes them to creditors according to the approved plan. This process provides a clear path for individuals to manage their financial obligations, catch up on overdue payments, and ultimately achieve a discharge of many of their remaining debts upon successful completion of the plan.

• Example 1: Saving a Home from Foreclosure

  Maria, a freelance graphic designer, experienced a temporary dip in income that caused her to fall several months behind on her mortgage payments. Although her income has now stabilized, she faces the threat of foreclosure. She wants to keep her home and has a steady stream of new client work.

  How it illustrates the term: Maria can file for Chapter 13 bankruptcy and propose a Chapter 13 plan. This plan would allow her to pay back the missed mortgage payments (the "arrears") over a period of three to five years, in addition to making her regular monthly mortgage payments. By successfully completing this plan, Maria can prevent foreclosure, keep her home, and manage her debt repayment in a structured, court-supervised manner without having to sell her property.

• Example 2: Consolidating and Managing Unsecured Debts

  David, a retail manager, accumulated significant credit card debt and personal loan obligations after a period of unexpected medical expenses. He has a stable job and wants to pay off his debts responsibly but finds the multiple minimum payments overwhelming and is making little progress.

  How it illustrates the term: David can propose a Chapter 13 plan to consolidate his various unsecured debts. Under the plan, he would make one manageable monthly payment to a bankruptcy trustee, who then distributes the funds to his credit card companies and personal loan lenders. This allows David to systematically pay down his debts over a set period (3-5 years) at an affordable rate, often paying back only a percentage of the total unsecured debt, while retaining his car and other personal assets.

• Example 3: Recovering from a Car Repossession Threat

  Sarah, a teacher, faced a sudden reduction in income due to a family emergency, causing her to miss several car loan payments. Her income has since returned to normal, but her car lender is threatening repossession.

  How it illustrates the term: Sarah can utilize a Chapter 13 plan to prevent the repossession of her car. Her plan would include a schedule to catch up on the missed car loan payments over the plan's duration (3-5 years), while also continuing her regular monthly car payments. This legal framework allows her to retain her vehicle, manage the overdue amounts, and ensure her creditors are paid according to a court-approved schedule.