Chapter 13 is designed for an individual or family who has a regular source of income. Chapter 13 allows the individual to propose a “plan” to repay creditors over time – usually three to five years. Chapter 13 is usually a better options for homeowners who are behind on their mortgage and are looking to catch up. Also, second mortgages or lines of credit can be eliminated through a chapter 13 when a home or rental property is underwater through a process commonly known as “Lien Stripping.” Car loans can be modified and payments can be reduced. Tax debts can be eliminated or paid over time without paying penalties or interest. Credit cards can be eliminated or a percentage of the total credit card debt can be paid over time without interest. Chapter 13 is also used by individuals who do not qualify for chapter 7 based on income, for those who wish to continue operating a business, and for individuals with too many assets that cannot be fully protected in a chapter 7.
At a confirmation hearing, the court either approves or disapproves the repayment plan. Chapter 13 is very different from chapter 7 since the individual makes payments to creditors, through the trustee, based on the individuals anticipated income over the life of the plan. Unlike chapter 7, the individual does not receive an immediate discharge of debts after 3 months. Instead, he or she must complete payments for 3 or 5 years before receiving a final discharge for any outstanding debts. The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect.