Chapter 13 plan

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Chapter 13 of the United States Bankrupcty Code allows individuals with regular income to develop a plan to repay some or all of their debts. Debtors are required under this chapter to propose a repayment plan to make installment payments from the debtor’s future income over a span of three to five years. If the debtor's monthly income is less than the state median, the plan will be for three years unless the court approves a longer period "for cause." However, if the debtor's monthly income is greater than the state median, the plan generally must be for five years. Monthly income is measured as the average monthly income the debtor received over the six calendar months prior to the commencement of the case.

Under the statute, the debtor (and only the debtor) may propose a chapter 13 plan. Generally, the debtor must file the plan when the case commences or within 14 days afterwards. A 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. The payments are made to the chapter 13 trustee who then distributes them to creditors in accord with the confirmed plan.

Unlike a chapter 11 reorganization plan, a chapter 13 plan does not allow creditors to vote on a chapter 13 plan. If finalized and confirmed, the plan 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.

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.

[Last updated in May of 2020 by the Wex Definitions Team]