Wage Earner’s Plan: What It Is, How It Works

What Is a Wage Earner’s Plan?

A wage earner’s plan, also known as Chapter 13 bankruptcy, allows individuals with regular income to restructure their debt obligations over time.

In a wage earner’s plan, the debtor does not seek general forgiveness of their debts. Instead, they propose a repayment plan that consolidates debts into a fixed monthly amount. Payments are made to an appointed trustee who then forwards them to the creditor for a specified period, typically three to five years.

Key Takeaways

• A wage earner’s plan, or Chapter 13 bankruptcy, enables individuals with regular income to repay debts and avoid foreclosure.
• Chapter 13 bankruptcy allows individuals to consolidate their debts into one monthly payment and save their homes from foreclosure.
• Filing for Chapter 13 bankruptcy stops foreclosure proceedings and allows individuals to pay off delinquent debts, including mortgage payments, over three to five years.

Understanding Wage Earner’s Plans

Chapter 13 bankruptcy, formerly known as a wage earner’s plan, now includes individuals with regular income regardless of how they earn it. This includes self-employed individuals and those operating unincorporated businesses.

Eligibility for Chapter 13 bankruptcy requires unsecured debts to be less than $394,725 and secured debts to be less than $1,184,200. Individuals must also complete credit counseling from an approved agency within 180 days of filing. Corporations and partnerships are not eligible for Chapter 13 bankruptcy.

Chapter 13 Bankruptcy vs. Chapter 7 Bankruptcy

Individuals in serious debt can file for either Chapter 13 bankruptcy or Chapter 7 bankruptcy. Chapter 13 allows debt reorganization, while Chapter 7 involves liquidation. With Chapter 13, debtors can retain their property, whereas Chapter 7 may require surrendering home equity, second homes, and vacation properties.

One advantage of Chapter 13 is the opportunity to save homes from foreclosure. By filing for Chapter 13, individuals can stop foreclosure proceedings and create a plan to pay off delinquent mortgage payments over three to five years. Chapter 7 erases existing debt but often involves surrendering one’s home.

In addition, Chapter 13 allows rescheduling of secured debts (excluding primary residence mortgages) and extends them over the plan’s duration, potentially reducing payments. A special provision may also protect co-signers by making payments through an appointed trustee, eliminating direct contact with creditors.

How to File for a Wage Earner’s Plan

When filing for Chapter 13 bankruptcy, debtors must list all creditors and amounts owed, along with owned property. Detailed information about income sources and monthly expenses is required, along with completion of credit counseling.

Example of a Wage Earner’s Plan

Eric and Sam, a married couple, faced financial difficulties due to job loss and injury. They fell behind on mortgage payments, leading to $75,000 in debt. By filing for Chapter 13 bankruptcy, they halted foreclosure proceedings and retained their home.

With a steady income, Eric and Sam can now afford to make monthly mortgage payments. Over a five-year period, they’ll gradually repay their back payments alongside manageable monthly payments.