Wage Earner Plan (Chapter 13 Bankruptcy)

A wage earner plan (Chapter 13 bankruptcy) enables individuals with a regular income to restructure their obligations to repay their debt over time. In such a plan, the debtor does not seek to earn general forgiveness of their outstanding debts. Rather, the debtor offers up a repayment plan that utilizes fixed installment payments. Such payments are made to a trustee who then forwards them to the creditor for a specified period, usually three to five years.

Chapter 13 bankruptcy was formerly called a wage earner's plan because relief under it was only available to individuals who earned a regular wage. Subsequent statute changes expanded it to include any individual, including the self-employed and those operating an unincorporated business.

Any individual is eligible for Chapter 13 relief as long as their unsecured debts are less than $394,725, and secured debts are less than $1,184,200 (as of 2018), and they have received credit counseling within 180 days before filing. A corporation or partnership is not eligible for Chapter 13 bankruptcy.

A person who is seriously in debt may file for either Chapter 13 or Chapter 7 bankruptcy. Chapter 13 allows for reorganization while Chapter 7 calls for outright liquidation or straight bankruptcy, which is how Chapter 7 is often referred to. One other big difference is that a wage earner plan (Chapter 13 Bankruptcy) allows debtors to keep their property. In a Chapter 7 bankruptcy the debtor may keep home equity or a car, though equity shares or second homes or vacation properties will be forfeit to pay back creditors.

A Chapter 13 bankruptcy offers individuals a number of advantages over Chapter 7, the most important being that it offers them an opportunity to save their homes from foreclosure. Chapter 13 also allows individuals to reschedule secured debts — except for a mortgage on their primary residence — and extend them over the life of the plan, which may lower their payments. In addition, Chapter 13 has a special provision that may protect co-signers, and also acts like a consolidation plan under which plan payments are made to a trustee who distributes them to creditors.

The repayment period depends on the debtor's monthly income as compared to the applicable state median. During this repayment period, the law forbids creditors from starting or continuing collection efforts. For more, see Chapter 13 Bankruptcy Basics from the Administrative Office of the U.S. Courts.