Jeffrey M. Rosenblum, P.C.
A Fresh Start

Why is Chapter 13 called a wage earner's plan?

You may have heard Chapter 13 bankruptcy referred to by its nickname: the wage earner's plan. If you ever wondered why it got this nickname, it actually tells you quite a bit about how the process works.

The general idea is that only someone with an income can use Chapter 13 bankruptcy. Older guidelines said the person needed to get a consistent wage. In modern usage, a traditional "wage" is not always required; for instance, self-employed workers who do not get paid by the hour or receive bi-weekly paychecks can also use it.

Those without a consistent income likely need to use Chapter 7. It liquidates assets to pay off the debt. Chapter 13 often preserves assets by using that wage to make monthly payments, instead.

Why would someone want to use bankruptcy if he or she has a solid income?

What you'll find is that Chapter 13 can make debt more affordable. For instance, perhaps you have credit card debt, a car loan and a business loan. You do earn an income, but you can't make all three monthly payments at once.

Under Chapter 13, your debt can get reorganized and consolidated. For the next three to five years, you just make one monthly payment, and it is applied to all of that debt. When the term runs out, you have paid off what you owed. Chapter 13 does not eliminate debt as much as it buys you more time to make sure you can pay it back. The payments and term are based in part on your income.

Are you facing debt that you simply can't afford any longer? If so, be sure you know about all of your bankruptcy options and the specialized plans they may provide.

Source: Investopedia, "Wage Earner Plan (Chapter 13 Bankruptcy)," accessed April 12, 2018

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