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Chapter 13 is a proceeding under which a debtor proposes to his or her creditors and the court, a plan that enables the debtor to repay as much debt as is feasible given the debtor's financial circumstances. To be confirmed by the court, a plan must provide that the debtor's future income be subject to court administration. After determining a reasonable budget, the debtor's remaining income is paid (generally monthly) by the debtor's employer to the trustee who, after taking a commission, pays the creditors according to the plan provisions. A plan generally lasts three years, but may last up to five years if the court approves the longer period, or if a debtor is required to propose a five-year plan due to their income level. At the end of the plan, the debtor is entitled to receive a discharge of any remaining debt.

Who May File for Chapter 13 Bankruptcy?

Chapter 13 is limited to individuals and unincorporated businesses that have a regular source of income, and whose secured debts are less than $1,010,650 with unsecured debts of less than $336,900. The term "regular source of income" has been interpreted to mean income that is sufficiently definite and certain to enable you, the debtor, to assign it to the trustee on a regular basis for payment by the trustee to your creditors.

What Are Some of the Advantages of Chapter 13?

  • Bars post-filing creditor actions against co-debtors if the creditor will be paid in full under the plan;

  • Debtor retains all desired property, provided creditors obtain at least as much under the plan as they would under Chapter 7;

  • Debtor may have the ability to "write-down" secured non-homestead debts to the value of the collateral;

  • Debtor may be able to modify interest rates on some loans and extend the payment term on non-homestead debts to make them more affordable;

  • Debtor may cure loan defaults by making installment payments, and reinstate accelerated mortgage and other notes;

  • The Chapter 13 discharge is broader than under Chapter 7, so that more types of debts are dischargeable;

  • Debtor may be able to force ("cram-down") affordable payments on secured and tax creditors that cannot be done under Chapter 7; and

  • Interest stops on most tax obligations paid under the Chapter 13 plan.

What Are Some of the Disadvantages of Chapter 13?

  • Debtor's future income is subject to administration by the trustee for up to three and possibly as long as five years;

  • Under the plan, the debtor must establish and live under a firm, but potentially adjustable budget during the repayment period;

  • The trustee is entitled to a commission on payments paid to creditors which reduces the value of what is paid to creditors; and

  • Still appears as a bankruptcy on credit reports.

* The information on this page is ©State Bar of Wisconsin. Used with permission

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