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Chapter 13 is a payment plan bankruptcy, also called a “reorganization” bankruptcy or “wage earner” bankruptcy. The best way to explain Chapter 13 is by using an example. Each case is unique, but let’s look at a hypothetical case for an idea of how it works.

Tom and Mary Smith earn $98,000 per year. They have one child. They owe $38,000 in credit card debt and medical bills, and have two car payments. On one car they owe $23,000, and on the other car they owe $14,500. Mary lost her job and was unemployed several months ago. During that time, they got behind on their house payment. They are facing foreclosure in two weeks. Mary is now employed again. Despite this, they are still $6,000 behind on their mortgage payments, and they have not been able to reach the right person at their mortgage company to work out a solution. They keep getting the “run around” and being passed from one representative to the other. Each time they call, the new person they speak to seems to have none of the information Mary gave the other representatives just days earlier. They do not want to lose their home.

Tom and Mary are above median income for a family of three in South Carolina. Median income is the 50th percentile, meaning that half of South Carolina families made up of three people made more than the Smiths, and half made less. Median income is about $55,000 for a family of three in South Carolina. Even if their mortgage payments were caught up, Tom and Mary would not be eligible for a Chapter 7, because they earn enough money to repay at least some amount to their creditors.

Let’s assume their net income (after taxes and any mandatory deductions) is about $6,000 per month. Let’s also assume that they need $4,500 per month to live on (for food, clothing, mortgage, transportation costs, health insurance, home maintenance, utilities, groceries, and so on). That leaves $1,500 per month available to be paid into a bankruptcy plan.

Tom and Mary propose to pay that $1,500 per month into their bankruptcy plan for five years. From that, the Chapter 13 Trustee takes less than 10% of each payment to run his office (he’s got expenses as well), then he pays the remaining money to the creditors, where it will be used to catch up, or “cure” the mortgage arrearage ($6,000 plus $2000 in foreclosure fees and costs), pay off both cars (those debts total $37,500 and will be paid with interest—many times at a lower rate than they had been paying), and pay whatever is left toward the unsecured debts ($38,000). Part of the attorney’s fees would also be paid in the plan.

Under this payment plan, the bankruptcy case would completely pay off both cars, catch up the past-due mortgage payments, pay any remaining amount owed for attorney fees, and pay a very substantial amount toward their unsecured debts. Once the Smiths’ plan is completed, they will receive a discharge. Their remaining debts are wiped out. (They must still continue to make their regular monthly mortgage payments, of course.)

There are other instances in which a client might want to file a Chapter 13. The example given above just serves as one illustration in which clients might opt for a Chapter 13. There are numerous others, and many chapter 13 bankruptcy plans are equally successful with much less money than $1,500 per month.

Whatever your situation is, our goal is always to find an appropriate solution for your financial problems.