In chapter 13, unlike chapter 7, the goal is to allow the debtor enough time to repay debts, usually with smaller payments than in prior agreed upon terms. A chapter 13, for example, can effectively cease the beginnings of a foreclosure process with the debtor presenting a repayment plan that shows how he or she will catch up on payments in arrears.
The repayment plan is often filed at the same time as the bankruptcy petition, but the debtor has 2 weeks from the time of filing to present the plan. The plan demonstrates how much the debtor can pay the trustee each month, towards all debts, while the trustee takes responsibility for the disbursement of these payments to the creditors.
Three types of financial claims must be considered in the repayment plan.
1) Priority claims are those identified by bankruptcy law as the creditors who should be paid first in a chapter 7.
2) Secured debt is any debt involving real property like homes, autos, recreational vehicles, jewelry, furniture, etc.
3) Unsecured debts are loans that do not have collateral like credit cards, personal loans, etc.
Priority claims must be paid in full, except when the debtor agrees to pay all disposable income to the repayment plan for the entire repayment period. But creditors of secured debt may have to settle for the value of the collateral. Unsecured debtsare paid a fixed amount determined by application of some complex tests set forth in the bankruptcy code. In a large number of cases no more is paid to unsecured creditors than they would have received in a chapter 7. In higher in come or larger asset cases, unsecured creditors do get paid more, but rarely the full amount, and almost never with interest.
It is up to the bankruptcy judge to determine if the repayment plan is fair and appropriate. Debtors whose income is lower than the median for their family size will only have to go through a three-year repayment period. For those with greater than median income, it will typically be a five-year repayment period. At the end of the repayment period, if it has been paid as agreed, remaining debts are discharged (with the exception of long-term debts, student loans, and some taxes related to late filed returns) and the debtor is free to begin rebuilding credit and financial well-being.