WHAT IS CHAPTER 13 BANKRUPTCY?
Chapter 13 is like a debt consolidation in which a monthly
plan payment is made to the bankruptcy trustee who
distributes payments to the creditors. Monthly payments are
made during the course of the plan which lasts three to
five years. The amount of the payments depends on monthly
disposable income. If the current monthly income is less
than the applicable state median, the plan will be for
three years. If the current monthly income is greater than
the applicable state median, the plan generally must be for
five years. During the pendancy of the plan, creditors
cannot continue collection efforts.
The plan must be proposed in "good faith" and meet two
other tests:
Best Interest of Creditors Test: the plan must give
unsecured creditors at least as much on their claim as they
would have gotten if the debtor filed Chapter 7; and
Best Efforts Test: the plan must provide unsecured
creditors an amount equal to the debtor's monthly
disposable income.
The plan must also provide for payment in full of priority
claims and generally provide for payment of the value of
secured claims on personal property (but not real estate),
in full over the life of the plan
Long term debt, like house mortgages, need not be paid off
in full in the plan, though the plan must cure any defaults
on long term debt.
Payments can be the same over the life of the plan; they
can start low and increase at intervals; or they can vary
with the seasons.
While a plan must provide enough money to pay the priority
claims (most commonly taxes and support) in full, payments
to other creditors may be little or even nothing.