A wage earner’s plan, known more formally as Chapter 13 bankruptcy, enables individuals with a regular income to restructure their obligations and repay their debt over time.
In a wage earner’s plan, the debtor does not seek general forgiveness of their outstanding debts. Instead, the debtor offers a repayment plan that uses fixed installment payments to consolidate debts into one manageable monthly amount. Payments are made to an appointed impartial trustee, who then forwards them to the creditors over a specified period, usually three to five years.
Key Takeaways
- A wage earner’s plan, also called Chapter 13 bankruptcy, allows individuals with steady employment income to repay debts associated with personal bankruptcy.
- One of the advantages of Chapter 13 bankruptcy over Chapter 7 is the possibility to save a home from foreclosure.
- By filing for Chapter 13 bankruptcy, individuals can halt foreclosure proceedings and submit a plan to pay off delinquent debts—including mortgage payments—over three to five years, effectively consolidating all debts into one monthly payment.
Understanding Wage Earner’s Plans
Chapter 13 bankruptcy was initially called a wage earner’s plan because it was available only to individuals with regular wages. Statute changes expanded eligibility to include any individual, including the self-employed and those operating an unincorporated business.
Eligibility criteria include having unsecured debts less than $394,725, secured debts less than $1,184,200, and receipt of credit counseling from an approved agency within 180 days before filing. Corporations or partnerships are not eligible for Chapter 13.
Chapter 13 Bankruptcy vs. Chapter 7 Bankruptcy
An individual heavily in debt may choose between Chapter 13 and Chapter 7 bankruptcy. Chapter 13 allows reorganization of debt, while Chapter 7 involves liquidation. Under Chapter 13, debtors keep their property, whereas Chapter 7 may result in forfeiting certain assets to pay creditors.
Chapter 13 provides the opportunity to save homes from foreclosure. By filing under this chapter, individuals can halt foreclosure and submit a plan to catch up on delinquent mortgage payments over three to five years. Though Chapter 7 permits erasing existing debt, it often leads to losing one’s home in the process.
A Chapter 13 bankruptcy also permits rescheduling of secured debts—excluding a mortgage on the primary residence—extending them over the plan’s duration to lower payments. Additionally, a special provision may protect co-signers. In this provision, debtors do not have direct contact with creditors, as payments are handled by an appointed trustee who distributes them to the creditors.
How to File for a Wage Earner’s Plan
To file for Chapter 13 bankruptcy, the debtor must list each creditor and the amount owed, and compile a list of owned property. Additionally, income details, including sources and amounts, and information about monthly expenses must be submitted. Completing credit counseling is also a prerequisite.
Example of a Wage Earner’s Plan
Eric and Sam, a married couple, faced financial difficulties when Eric lost his job, and Sam’s injury prevented him from working. They owed $75,000 in mortgage back payments, and foreclosure proceedings started. After Eric secured a new job and Sam started a home-based business, they filed for Chapter 13 bankruptcy, stopping foreclosure and keeping their home.
With a steady income, they can now pay their ongoing mortgage payments. Their back mortgage payments are scheduled over five years, with manageable installments, helping them regain financial stability.
Related Terms: Chapter 7 bankruptcy, Debt restructuring, Credit counseling, Unsecured debts, Secured debts.
References
- Administrative Office of the U.S. Courts. “Chapter 13 - Bankruptcy Basics”.
- Administrative Office of the U.S. Courts. “Chapter 7 - Bankruptcy Basics”.
