Chapter 13, is known as personal reorganization. Chapter 13 is for individual debtors who have a regular source of income.
Most of the time, Chapter 13 is more desirable than Chapter 7 because it allows the debtor to keep a valuable asset, such as a house. Chapter 13 also allows the debtor to propose a “plan” to repay creditors over time – usually three to five years.
Chapter 13 is also used by consumer debtors who do not qualify for Chapter 7 because of the means test. At a confirmation hearing, the judge either approves or disapproves the debtor’s repayment plan, depending on whether it meets the Bankruptcy Code’s requirements for confirmation. Chapter 13 is very different from Chapter 7. In Chapter 13 debtors usually keeps the property of the “estate” and makes payments to creditors, through the trustee, based on the debtor’s anticipated income over the term of the plan.
Another advantage of Chapter 13 is that the debtor may (with limited court approval) either dismiss their Chapter 13 case, or convert it to Chapter 7 (usually when their income does not match their “projected income”).
However, the debtor does not receive an immediate discharge of his or her debts. The debtor must complete the payments required under the plan to receive a discharge.
The debtor is protected from lawsuits, garnishments, and other creditor actions while the plan is in effect. The discharge is also somewhat broader (i.e., more debts are eliminated) under Chapter 13 than the discharge under Chapter 7.