What Is a Wage Earner Plan in Bankruptcy?

A wage earner plan, also known as Chapter 13 bankruptcy, offers individuals with a steady income a way to manage financial obligations. Debts are reorganized under federal court protection. Debtors repay creditors through a manageable plan over a specified period, often retaining assets. This offers an alternative to Chapter 7 liquidation, where assets may be sold.

Eligibility and Information Gathering

Individuals filing Chapter 13 must meet eligibility requirements. This option is available to individuals, including sole proprietors, but not corporations or partnerships. A regular income source is required to fund a repayment plan. Statutory limits exist on the amount of debt that can be reorganized.

As of April 1, 2025, unsecured debts (like credit card balances and medical bills) must be less than $526,700. Secured debts (such as mortgages and car loans) must be less than $1,580,125. These figures adjust periodically for inflation. Before filing, financial documentation is necessary.

Before filing, gather:
Proof of income (pay stubs, tax returns).
List of all creditors, detailing amounts owed and distinguishing between secured and unsecured obligations.
Inventory of all assets (real estate, vehicles, bank accounts).
Breakdown of monthly living expenses.
Mandatory credit counseling course completion from an approved agency.

Structuring the Repayment Plan

The repayment plan, central to Chapter 13, outlines how debts are addressed over three to five years. “Disposable income” calculation determines monthly payments. Disposable income is the amount remaining after deducting allowed living expenses and mandatory payments (e.g., secured and priority debts). If income exceeds the state median, the calculation becomes more intricate, relying on IRS-determined expense standards rather than actual expenses.

Different types of debts are treated distinctly within the plan. Priority debts, including recent income taxes, child support, and alimony, must be paid in full over the plan’s life. They are important under bankruptcy law.

Secured debts, backed by collateral like a home mortgage or car loan, are handled in various ways. The plan can cure defaults, allowing debtors to catch up on missed payments while maintaining regular payments. For certain assets, a “cramdown” may reduce the debt’s principal balance to the collateral’s fair market value, reclassifying the remainder as unsecured debt. However, a cramdown is not permitted for a mortgage on a debtor’s primary residence. For vehicles, the loan must be at least 910 days old (approximately 2.5 years).

Unsecured debts, such as credit card balances and medical bills, are paid a percentage of the amount owed, determined by the debtor’s disposable income and the value of any non-exempt assets. The Chapter 13 trustee collects and distributes payments to creditors according to the confirmed plan.

The Bankruptcy Filing Process

A Chapter 13 case begins with submitting the bankruptcy petition and proposed repayment plan to the court. This filing triggers the “automatic stay,” which halts most collection actions by creditors, including phone calls, lawsuits, wage garnishments, foreclosures, and repossessions. This protection provides debtors a respite from collection efforts.

Following the initial filing, debtors must attend a mandatory “Meeting of Creditors,” also known as the 341 meeting. This meeting occurs between 21 and 50 days after the petition is filed and is presided over by the Chapter 13 trustee, not a judge. The trustee verifies the debtor’s identity, reviews financial paperwork, and asks questions about their financial affairs under penalty of perjury. While creditors are invited, they rarely attend, as the trustee represents their interests.

The Confirmation Hearing is the final procedural step before the plan becomes official. This hearing takes place within 45 days of the 341 meeting and is held in a courtroom before a bankruptcy judge. The court reviews the proposed plan for compliance with bankruptcy law, feasibility, and equitable treatment of creditors. If the plan meets legal requirements and objections are resolved, the judge confirms it.

Managing Your Plan After Confirmation

After court confirmation, the debtor’s ongoing obligation is to make consistent payments to the Chapter 13 trustee as outlined in the approved plan. These payments are important for successful completion. The trustee monitors the plan, ensuring payments are received and distributed to creditors.

Debtors are required to report any significant changes in income or expenses to the trustee and the court. This allows for modifications if financial circumstances change, ensuring the plan remains feasible and fair. Restrictions exist on incurring new debt during the plan, as additional obligations could jeopardize completing payments.

Upon successful completion of all payments and requirements under the confirmed plan (spanning three to five years), the court issues a discharge order. This discharge releases the debtor from remaining eligible debts included in the plan (e.g., credit card debt, medical bills). However, certain debts (e.g., most student loans, recent taxes, domestic support obligations) are not dischargeable in Chapter 13 and remain the debtor’s responsibility.