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Simple English definitions for legal terms
Chapter 13 plan
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A quick definition of Chapter 13 plan:
Chapter 13 is a part of the law in the United States that helps people with regular income to pay back some or all of their debts. This plan requires the debtor to make payments from their future income over a period of three to five years. The debtor proposes the plan and must file it within 14 days of starting the case. The plan details how much money will be paid to the trustee on a regular basis, usually every two weeks or every month. Unlike Chapter 7, which uses assets to pay creditors, Chapter 13 uses income. The plan allows the debtor to keep their property and pay off long-term debts, like a mortgage. Creditors do not get to vote on the plan, but they may object if it does not follow the law. If the plan fails, the debtor can convert the case to Chapter 7 or seek a hardship discharge. If the debtor does not follow the plan, the court may dismiss the case.
A more thorough explanation:
Chapter 13 is a part of the United States Bankruptcy Code that allows individuals with regular income to create a plan to repay some or all of their debts. This plan requires the debtor to propose a repayment schedule to make installment payments from their future income over a period of three to five years.
For example, if someone has a monthly income that is less than the state median, their plan will be for three years unless the court approves a longer period "for cause." However, if their monthly income is greater than the state median, the plan generally must be for five years. The debtor must file the plan when the case commences or within 14 days afterward.
The repayment plan must detail a schedule of payments of fixed amounts to the trustee on a regular basis, usually biweekly or monthly. Unlike a chapter 7 liquidation, a chapter 13 plan generally uses the debtor’s income rather than assets to pay various creditors. And unlike a liquidation under chapter 7, a chapter 13 plan allows a debtor to retain the collateral for the claims of creditors and pay off long-term debts, such as a mortgage for a home.
For example, if someone has a mortgage for their home and is struggling to make payments, they may file for Chapter 13 bankruptcy and create a repayment plan to pay off their mortgage over a period of three to five years. This allows them to keep their home while also paying off their debt.
If the plan is finalized and confirmed, it will discharge the debtor’s many debts. Depending on the case, the plan may call for full repayment or offer creditors a percentage of their claims.
For example, if someone owes $10,000 to a credit card company, their Chapter 13 plan may offer to pay the company $5,000 over a period of three to five years. This allows the debtor to pay off their debt while also reducing the amount owed to the creditor.
However, the plan may fail to adequately compensate the creditors, either by design or by the debtor’s failure to complete the plan. In that event, the debtor can convert the case into a chapter 7 proceeding or seek a hardship discharge under Section 1328(b). Alternatively, a party with an interest may object to confirm a proposed plan if it does not conform with the Bankruptcy Code’s requirements. Similarly, the court will dismiss the case if the debtor fails to comply with the plan.