Chapter 13 of the United States Bankruptcy Code, also commonly referred to as a "Reorganization Bankruptcy," is designed to allow debtors to reorganize their finances in order to ultimately repay at least a portion of their outstanding debts.
A Chapter 13 Bankruptcy involves a Repayment Plan that includes payment of all past due and ongoing current payments owed to secured creditors for the assets retained by the Debtor. Unsecured creditors usually receive at least a small portion of the debts owed to them, as well. While there is no asset liquidation in Chapter 13, the non-exempt equity value of a Debtor's assets must be contributed to non-priority unsecured creditors through the repayment plan amount.
The Repayment Plan lasts for three to five years and payments are made to a Bankruptcy Court assigned Chapter 13 Bankruptcy Trustee, usually through a withholding of the Debtor's wages equal to their disposable monthly income.
A Chapter 13 Debtor must have a regular source of income - at least enough to feasibly facilitate the Repayment Plan, in addition to the Debtor's ongoing monthly living expenses.
For Debtors needing bankruptcy protection, Chapter 13 is generally most effective when one or more of the following conditions apply:
1) The Debtor wishes to prevent a foreclosure or repossession of an asset securing a debt due to arrearages that could feasibly be cured within a reasonable Repayment Plan with the elimination of or reduction in unsecured debt obligations.
2) The Debtor has non-exempt equity value assets that would be liquidated in Chapter 7 Bankruptcy, but for which they can feasibly pay unsecured creditors an amount equal to the non-exempt equity value in through a Chapter 13 Repayment Plan.
3) The Debtor is ineligible for Chapter 7, and still requires a bankruptcy solution to their financial problems.