Chapter 13 bankruptcy varies by each district that it occurs in but is uniformly powerful. It is a reorganization plan for an individual with regular income who can make some payment to creditors. Unless they choose not to, they will be able to keep their possessions and their debts will be forgiven by the end of the proceedings. Here are the basics of how Chapter 13 works.
The debtor proposes a payment plan guided by the application of the means test. Once the plan has been proposed, a schedule of proceedings is sent to every creditor so they can purusue repayment, but often times with Chapter 13 bankruptcy, there may be no payment at all to general unsecured creditors.
The plan must include two sections and two subsequent 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 creditors the same amount as a debtor’s monthly disposable income multiplied by either 60 or 36, depending on the debtor’s income. These numerical values are considered to be the best effort offered by the debtor.
The plan must prioritize claims and as all cases of bankruptcy dealings, secured creditors will often receive priority. It is expected that throughout the procedures of the bankruptcy and the subsequent payments, the secured creditors will be paid back in full. However, this is not the case with unsecured creditors. The debtor must pay either: the amount proposed in a chapter 7 plan, how much income the means test says the debtor has, the amount that will allow the priority claims to be paid fully; the debtor must pay the one of these that is the most amount of money.
The trustee acts as the disbursing agent for the payments made into the plan: he collects the debtor’s payment and pays it to creditors as provided by the plan in that case. Even though other forms of bankruptcy (namely, chapter 7) have the debtor tallying up their possessions and selling them, chapter 13 does not entail that process. Those overseeing the case will defy and protest plans that don’t, in their opinion, meet the tests for detailed plans set out in the Bankruptcy Code.
Plans run from three to five years with Chapter 13. The plan does not say that you must pay off all debt. Some debts, like long-term house mortgages and things like that can wait, but if there any defaults that has to be taken care of. How much the payments are is usually up to the debtor and will be proposed in the plan; the payments can vary or remain consistent, whatever is preferable, as long as they get paid. Again, the plan must provide repayment to priority claims (these entail taxes and support, usually), but often times, other (unsecured) creditors do not have to be paid back in full, or even at all.