The Bankruptcy Code provides for adjustment of debts for individuals with regular income in Chapter 13, and is known as a Chapter 13 bankruptcy. A debtor can keep property in a Chapter 13 bankruptcy while paying down debts over a period of 3 to 5 years.

Chapter 13 bankruptcy is sometimes called a reorganization or a wage-earner’s plan. It allows for individuals to create a plan that will repay all or some of their debts.

The heart of the Chapter 13 bankruptcy is the Chapter 13 Plan, which the debtor proposes as a way of making payments to creditors over a three to five year period. The period can be as little as 3 years if the debtor’s current monthly income averaged over the last six months is below the state median.

If the debtor’s current monthly income is greater than the applicable state median, the bankruptcy plan generally must be for five years. In no case may a Chapter 13 plan provide for payments over a period longer than five years. During this time the law forbids creditors from starting or continuing collection efforts.

A Chapter 13 bankruptcy offers many advantages to individuals that you cannot find in a liquidation under Chapter 7 bankruptcy. One key advantage is that Chapter 13 allows to individuals to keep their homes when faced with a foreclosure.

By filing under this chapter, individuals can stop foreclosure proceedings and may cure delinquent mortgage payments over time. Nevertheless, they must still make all mortgage payments that come due during the chapter 13 plan on time.

Another advantage Chapter 13 has over Chapter 7 is that secured debts (other than a home) can be crammed-down or rescheduled and extended over the life of the bankruptcy. This often means substantially lower monthly payments.

Chapter 13 bankruptcy also has a special provision that protects third parties who are liable with the debtor on “consumer debts.” This provision may protect co-signers. Also, chapter 13 acts like a consolidation loan under which the individual makes the plan payments to a chapter 13 trustee who then distributes payments to creditors. Individuals will have no direct contact with creditors while under chapter 13 bankruptcy protection.

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