In Chapter 13, a plan is proposed to make monthly payments on debts over a three- to five-year period. These payments are made to the Chapter 13 Trustee, who then sends payments to creditors according to the order specified in the plan.
Contrasted with Chapter 7 “regular old” bankruptcy, in which most debts are discharged in exchange for the liquidation (sale) of the debtor’s non-exempt property, Chapter 13 is a “reorganization” bankruptcy in which the debtor does not involuntarily lose ANY property. What the debtor must do, however, is pay his or her unsecured creditors over the term of the plan the “liquidation value” of their property, which is the amount a Chapter 7 trustee could realize from the debtor’s non-exempt property as of the date the Chapter 13 case is filed. Fortunately, the liquidation value is almost always minimal if not $0.00.
So, in Chapter 13, a typical debtor can reduce interest rates on secured debt (cars, furniture, etc.) and usually reduce the monthly payment, stop foreclosures, pay past-due taxes over time, and greatly reduce or eliminate altogether unsecured debts such as credit cards, payday loans, medical bills, etc.
