Chapter 13 bankruptcy is also known as the wage earner’s plan because when you file, you must have adequate income to create a repayment plan. Instead of the court wiping out all of your debts, you create a plan to allow you to pay back as much debt as possible within the set time.
According to the U.S. Courts, the chapter 13 plan allows you to prioritize the repayment of debts while also ensuring you have enough money left to cover your everyday expenses.
Debts will fall into three categories. Priority debts are those you must pay. They are exempt from dismissal through bankruptcy. These are things such as child support and taxes.
The next category is secured debts, which are those you used collateral to secure. Examples of this type of debt include your home or vehicle.
The last category is unsecured debt, which is anything that does not fall into the other two categories. This would include your credit card debt.
The basic goal of your bankruptcy plan is to repay all priority debts and secured debts. If you have money left over, you would pay off unsecured debts.
Your repayment plan will consider your monthly income and regular expenses. The court will determine your disposable income, which is that you do not need for your expenses. This money will go towards your monthly debt payment. Your trustee will collect this money from you and distribute it according to the priority of your debts.
You will not likely be able to repay all debts in full. It is common for creditors of unsecured debts to receive no money. As long as you complete the plan and pay your monthly payment, the court will then dismiss secured and unsecured debt balances at the end of your repayment period.