Consumers who experience serious financial problems may often wonder what, if any, options exist to help them get out of debt. In some situations, filing for bankruptcy may provide that opportunity.

Chapter 7 bankruptcy plans may be the most commonly filed, but Chapter 13 bankruptcy plans offer unique benefits for some people. Understanding how this type of bankruptcy works is important as it differs in many ways from Chapter 7.

Debt reorganization versus liquidation

As explained by Credit Karma, in a Chapter 7 bankruptcy, some of a person’s assets may be seized and sold for repayment as part of the plan. In a Chapter 13 bankruptcy, however, no asset seizure occurs. Instead, included debts are consolidated for a structured form of repayment.

A trustee works with creditors to align on agreed repayment terms. The consumer makes regular payments to the trustee every month during the Chapter 13 bankruptcy. The trustee, in turn, pays the creditors per the agreement. At the end of the plan term, any remaining debts are discharged. A Chapter 13 bankruptcy lasts between 36 months and 60 months.

Consumers wanting to avoid losing their homes or other tangible assets may find a Chapter 13 bankruptcy appropriate for their debt relief needs.

The Chapter 13 means test

Not every consumer may qualify for a Chapter 13 bankruptcy. According to the U.S. Courts, a person’s income and expenses must be reviewed via the means test. This determines if the person has sufficient income for this plan. A Chapter 13 bankruptcy may often be referred to as a wage earner’s plan.