Chapter 13 of the federal Bankruptcy Code allows a consumer to repay all or a majority of his or her debts through a payment plan approved by the Bankruptcy Court. When the plan is in place, creditors generally are not allowed from collecting debts directly from the debtor. Instead of paying his or her creditors directly, the debtor pays a certain amount every month to the Chapter 13 Trustee (there are some exceptions, such as some leases payments that are made directly to the lessor), and the Trustee distributes the money to the creditors, as provided in the Chapter 13 plan. When the last payment is made, the debtor is no longer liable for the remainder of his or her dischargeable debts.

Most, but not all, debtors are better off filing off under chapter 7.  The means test will determine whether you have to file chapter 13 and will be precluded from filing under chapter 7.  However, Chapter 13 is preferable to Chapter 7 when: you own your home and you are in danger of losing it to foreclosure (ALERT: see front page of site for July 22, 2007 law change and check for more information here: new Washington State Homestead Exemption for Bankruptcy cases), but you could get caught up if given time; you are behind in your automobile payments, but can catch up if given time; you have valuable nonexempt property which you would like to retain and you can afford to pay creditors from your income over time; you have debts which are dischargeable in Chapter 13 but not Chapter 7 (e.g., debt incurred through fraud); you owe the IRS or the state for taxes.

In some cases, if you have high income and an ability to repay your debts over time (and that question itself requires a consideration of numerous factors), you may not be permitted a discharge in Chapter 7 and Chapter 13 is your only option.