Legal Definitions - wage-earner's plan

A wage-earner's plan, more formally known as Chapter 13 bankruptcy, is a type of bankruptcy available to individuals with a regular source of income. It allows them to reorganize their finances and propose a court-approved plan to repay all or a portion of their debts over a fixed period, typically three to five years. Unlike Chapter 7 bankruptcy, which often involves liquidating assets, a wage-earner's plan enables debtors to keep their property, such as a home or car, while making manageable payments to creditors under the supervision of a bankruptcy trustee.

Here are some examples illustrating how a wage-earner's plan might apply:

• Example 1: Catching Up on Mortgage and Car Payments

  Scenario: Sarah, a graphic designer with a steady salary, faced unexpected medical bills that caused her to fall behind on her mortgage and car loan payments. She doesn't want to lose her home or car, and now that her medical crisis is resolved, she has a stable income again but needs a structured way to catch up on the arrears and manage her other debts.

  Illustration: Sarah could file a wage-earner's plan (Chapter 13). Her plan would propose regular payments to the mortgage lender to catch up on the missed payments over several years, while also continuing her regular monthly payments. Similarly, she could include her car loan and other unsecured debts like credit cards, consolidating them into a single, manageable monthly payment determined by the court and her financial situation. This allows her to keep her assets while repaying her debts.

• Example 2: Small Business Owner Consolidating Debt

  Scenario: Mark owns a successful landscaping business as a sole proprietorship, generating a consistent income. However, he accumulated significant credit card debt during a slow season and now struggles to make the high minimum payments. He wants to pay off his creditors but needs a lower, more structured payment plan that doesn't require him to sell his business equipment or personal assets.

  Illustration: Mark, as an individual with regular income from his business, can utilize a wage-earner's plan. The plan would allow him to consolidate his credit card debt and potentially other personal debts into a single monthly payment over three to five years. This court-approved structure would provide him with legal protection from creditors while he systematically repays his obligations, allowing him to continue operating his business and retain his assets.

• Example 3: Preventing Foreclosure After Job Loss

  Scenario: The Rodriguez family fell behind on their mortgage payments after Mr. Rodriguez experienced a temporary job loss. Mrs. Rodriguez has since found a new, stable job, and their combined income is sufficient to cover their current mortgage payments, but they cannot afford to pay the accumulated past-due amount all at once. They want to save their home from foreclosure.

  Illustration: The Rodriguezes can file a wage-earner's plan. This plan would allow them to propose a repayment schedule for the mortgage arrears (the past-due amounts) over the next three to five years, in addition to making their regular monthly mortgage payments. The court's approval of the plan would halt the foreclosure process, giving them the necessary time and structure to catch up on their payments and protect their family home.