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What is Chapter 13 bankruptcy?

Chapter 13, which is sometimes called a "wage-earner bankruptcy" or an "income-based bankruptcy," is a reorganization of debt bankruptcy. Unlike Chapter 7 bankruptcy, under Chapter 13 assets are not liquidated, and debts are not discharged. Rather, future earnings are collected by a trustee, appointed by the bankruptcy court, and paid out to unsecured creditors. The debtor has what is termed a "plan of rehabilitation" that reduces debt obligations.

Over a period of time, the debts are reorganized, hence the name "reorganization of debt bankruptcy." Under a Chapter 13 bankruptcy, a debt must meet certain debt limits: about $337,000 for unsecured debt and just over $1 million for secured debt. These limits are periodically changed and updated.