A chapter 13 bankruptcy is a type of restructuring plan that is much less severe than a chapter 7 bankruptcy. A chapter 7 discharges debts immediately, but grants the bankruptcy court broad powers to take and sell borrower possessions to pay key debts. A chapter 13 plan offers much more protection, but in return the borrower must make monthly payments to a plan that the bankruptcy trustee creates. The trustee then pays a portion of this money to all the most important creditors. The plan lasts up to five years, after which any remaining debts are forgiven.
Chapter 13 Plan
A chapter 13 plan is not created by the trustee out of thin air. At the beginning of the chapter 13 bankruptcy, the debtor must provide extensive financial information to the trustee, including information on all current debts, all necessary expenses (like food and gas) and all income received per month. The trustee then makes a plan that requires payment, but leaves enough money for monthly expenses. If spouses file bankruptcy together, the payment plan may require an entire paycheck from one of them, but enough money should be left over to live on.
Income Changes
If a debtor experiences income or expense changes when filing for the chapter 13, the debtor should immediately notify the trustee of the changes. In many cases, the trustee is able to alter the payment plan to take the changes into consideration if income has fallen. If income rises, the trustee may require extra payments, but only for the first 36 months of the plan. After that, changes are rare unless income drastically falls.
Exempt Income
There will always be some types of income that are exempt from the chapter 13 plan, income that the trustee cannot include in required payments. For instance, retirement income from a 401(k) is exempt, allowing retirees to continue depending on that source of money. Social Security income is also protected, as are many types of insurance-based income, such as disability payments received from a job.
Major Financial Changes
Debtors must also let the trustee know about any other financial changes, especially those that count as a sudden, lump-sum increase in monthly income. For instance, debtors must get court approval to sell their houses. When the house is sold, the proceeds go to paying off the mortgage. If there is any money left, the trustee will take it to pay off a section of the payment plan so it can be completed more quickly.
