ABA Family Legal Guide

Consumer Bankruptcy

Chapter 13: Wager-Earner or Individuals with Regular Income Bankruptcy

Chapter 13 Defined

What are the main differences between Chapter 7 and 13?

The major difference is that in Chapter 7 you pay debts out of your nonexempt assets, while in Chapter 13 you pay debts out of your future income. As a result, a repayment plan under Chapter 13 normally allows you more time to pay your debts than does a Chapter 7 plan, involves you paying off more of those debts, and allows you to deal more easily with secured creditors (e.g., home mortgage lenders and companies providing financing for your purchase of a car or truck). The permitted repayment period is usually three years for people whose income is below your state's median income and five years for those debtors whose disposable income is above the median in their state.

Not everyone is eligible for relief under Chapter 7. Congress created a "means test" for Chapter 7 filers that is more fully explained in the section on "Chapter 7 or Chapter 13?" As a result, more people may file under Chapter 13.

Typically, the amount that you repay under a Chapter 13 plan is equal to the total of your planned monthly payments over three to five years, assuming a good-­faith effort to repay your debts. Thus, your payments represent either (1) full satisfaction of your debts; or (2) all of your disposable income for a three-­ to five-­year period. Disposable income consists of whatever is left over from your total income after you have paid for taxes and reasonable and necessary living expenses. For some above-median-income debtors, allowable expenses are determined in large part by IRS regulations. It is important to consult with an attorney to determine what expenses are permitted. Under a Chapter 13 plan, debtors must also pay secured creditors the values of their liens over time, and cannot change the terms of their home mortgage loans. A debtor can, however, cure any delinquent payments on their mortgage loan over the life of the plan.