A Chapter 13 bankruptcy is a form of bankruptcy specifically designed for indivduals—but not businesses—with stable, steady income. These individuals that file for a Chapter 13 bankruptcy are known as a “Debtor”. The people and businesses that are owed money from the Debtor are known as “Creditors”. These terms are important terms for the reader to understand for purposes of the discussion set forth below.
When a Chapter 13 bankruptcy is commenced, the Debtor must propose a repayment Plan to its Creditors. The Plan will specify the amount of money that the Debtor has each month to repay his or her Creditors. This monthly payment amount is calculating by examining the Debtor’s monthly income and the Debtor’s ordinary and necessary monthly expenses. The difference between the Debtor’s monthly income and expense is known as the Debtor’s “Disposable Income” (another important term for the reader to remember).
By way of the Plan and the Chapter 13 process, the Debtor will promise the Creditors that he or she will pay their monthly Disposable Income over the course of the Plan in full satisfaction for the Debtor’s debt. The length of the Plan will either be Three (3) or Five (5) years depending on how the Debtor’s monthly income compares to the median family income for the Debtor’s state and household size. In most instances, candidates for a Chapter 13 bankruptcy will be required to propose Five (5) year plans to their Creditors.
Once a Plan has been proposed, the Debtor will then be required to deliver his or her monthly Disposable Income (or “Plan Payment”) to a Chapter 13 “Trustee”. The Trustee’s job is to collect the Debtor’s monthly Plan Payment and disburse those payments to the Creditors on a pro-rata basis.
If the Chapter 13 completes all the Plan Payments that are required under the Plan, the Debtor will then receive an Order from the Bankruptcy Court that is known as a “Discharge”. The Discharge terminates any further liability that the Debtor will have to pay the remaining debts that are owed to the Creditors, even if the Creditors do not receive full payment of their debt under the terms of the Plan. Importantly, there are certain types of debt are “non-dischargeable”. Those include, but are not limited to, child support, alimony, certain taxes, student loans, and sometimes certain loans (like home mortgages and car loans) secured by property the Chapter 13 bankruptcy debtor wants to keep.
Like all bankruptcy cases, a Chapter 13 bankruptcy is a complicated process. Fortunately, Dal Lago Law has the ability and sophistication that allows us to guide you through the process. We invite you review our Frequently Asked Questions page regarding Chapter 13.