Wage Earner’s Plan (Chapter 13 Bankruptcy)

A wage earner’s plan, commonly called Chapter 13 bankruptcy, lets individuals with a regular income reorganize and repay debts over time while protecting assets from foreclosure. Rather than liquidating assets or seeking broad debt forgiveness, the debtor proposes a court-approved repayment plan with fixed monthly payments made to a trustee, who distributes funds to creditors. Plans typically last three to five years.

How it works

• The debtor proposes a repayment plan that consolidates debts into one monthly payment.
• Payments are made to an impartial trustee, who distributes funds to creditors according to the plan.
• The court issues an automatic stay when the case is filed, halting most collection actions, including foreclosure proceedings.
• At the end of a successful plan, remaining qualifying dischargeable debts may be wiped out per the terms of the plan.

Eligibility

• Available only to individuals (not corporations or partnerships).
• Debt limits (current as stated):
• Unsecured debts must be less than $394,725.
• Secured debts must be less than $1,184,200.
• The filer must complete credit counseling from an approved agency within 180 days before filing.
• Historically limited to wage earners, but now available to individuals with any regular income source (including self-employed persons operating unincorporated businesses).

Chapter 13 vs. Chapter 7: Key differences

• Chapter 13 = reorganization; Chapter 7 = liquidation.
• Chapter 13 allows debtors to keep property and cure delinquent mortgage payments over time, often preventing foreclosure.
• Chapter 7 can discharge unsecured debts more quickly but may require surrendering nonexempt property (e.g., second homes, significant equity).
• Chapter 13 can reschedule (extend) certain secured debts over the life of the plan—generally excluding the primary residence mortgage.
• Chapter 13’s trustee-based payment system can help protect co-signers because creditors receive payments through the trustee rather than direct debtor contact.

How to file

1. Complete required credit counseling from an approved agency.
2. Prepare and file bankruptcy forms listing:
3. All creditors and amounts owed.
4. All property and assets.
5. Detailed income sources and monthly expenses.
6. Propose a repayment plan (usually 3–5 years) and submit it to the court and trustee.
7. Make plan payments to the trustee as directed; the trustee distributes funds to creditors under the plan.
8. Attend required hearings and comply with plan reporting duties.

Example

A married couple fell behind on their mortgage after one partner was laid off and the other was injured. When steady income resumed (a new job and a small business), they filed Chapter 13 to stop foreclosure and repay missed mortgage payments over five years while continuing current monthly mortgage payments. This allowed them to keep their home and spread arrears into manageable installments.

Advantages and limitations

Advantages:
* Stops foreclosure and allows catching up on missed mortgage payments over time.
* Enables debtors to keep property and reorganize secured debts.
* Payments are centralized through a trustee, which can protect co-signers.

Limitations:
* Not available to businesses organized as corporations or partnerships.
* Debt limits restrict eligibility for very large debts.
* Requires steady income and a commitment to a multi-year repayment plan.

When to consider Chapter 13

Consider Chapter 13 if you have a regular income, want to stop foreclosure, need time to catch up on secured debt arrears, and prefer reorganizing debt over liquidation. If your priority is to discharge most unsecured debts quickly and you lack nonexempt property, Chapter 7 may be more appropriate. Consult a bankruptcy attorney or qualified counselor to evaluate which option fits your situation.

Key takeaways

• Chapter 13 (wage earner’s plan) reorganizes debt into a court-approved repayment plan lasting three to five years.
• It can stop foreclosure and help debtors keep property while repaying arrears.
• Eligibility requires meeting debt limits and completing pre-filing credit counseling.
• Payments go to a trustee who distributes funds to creditors under the plan.