Why is Chapter 13 called wage earner’s bankruptcy?

On Behalf of | Nov 8, 2021 | Chapter 13 Bankruptcy

When people talk about Chapter 13 bankruptcy, they often refer to it as a plan for those with a regular income. In fact, the U.S. Courts call it a wage earner’s plan. This is starkly different from other types of bankruptcy.

Why does it have this nickname? The reason sheds light on the unique goals of Chapter 13, which are often far different than people assume.

Creating a repayment plan

The overall goal of Chapter 13 is to set up a repayment plan. There is a common misconception that bankruptcy always means that:

  1. You have no money on hand.
  2. You have no money coming in.
  3. You can never pay your debts back.
  4. You need to erase those debts without paying them.

However, many people simply have too much debt or they have debt that is structured in a way that just doesn’t make sense with their current income levels.

For instance, maybe you’re a small business owner who did not quite get your income forecasts correct. You took on debt based on how much you thought you’d earn, but you’ve earned 75% of that amount.

This does mean that your debt is unsustainable and you’re having trouble paying it back, but it certainly doesn’t mean that you have no income. You still do bring in money consistently. You don’t need to erase your debt. You just need to set it up in a way that works for you.

Chapter 13 does this by creating a repayment plan. These typically last for three to five years. The debt you have now gets spread out so that it works with your current income. This is a way of managing debt, not eliminating it. You still pay it back over time, and your business can keep operating while you do. Don’t assume you have to close your doors. As long as you’re earning money, there are solutions you can use.

Getting the process started

If you need to file for bankruptcy, be sure you know exactly what options you have. It’s very important to select the right one for your situation.