Wage Earner Plan

Popular name for a debt repayment plan under Chapter 13 of the Bankruptcy Code. The debtor voluntarily agrees to repay over a three- to five-year period a portion of obligations due creditors in exchange for a promise by creditors to refrain from further collection efforts. Court supervised repayment plans help debtors earning a regular income restore their credit ratings without liquidating their personal or financial assets. See also Liquidation.

A form of bankruptcy under a former federal law whereby an individual retained her property and paid off a debt over a period of time, as determined by a court and subject to supervision by the court.

Under Chapter Thirteen of the federal bankruptcy statutes (11 U.S.C.A. § 1301 et seq.), individuals who are unable to repay their debts when due may develop a plan for full or partial repayment. This procedure was formerly called a wage earner's plan because it was available only to persons who earned a regular wage. Changes in the statute now permit the owners of unincorporated small businesses to participate in this procedure, which is now known as either a Chapter Thirteen proceeding or a rehabilitation. A rehabilitation process enables the debtor to regain good credit and financial standing.

To qualify, an individual must have unsecured debts (those not backed by collateral to guarantee their repayment) of less than $100,000 and secured debts (backed by collateral) of less than $350,000. A debtor files a Chapter Thirteen petition listing all of his debts. Upon the filing, the debtor's creditors must suspend their efforts to collect or enforce their claims, pending the outcome of the proceeding.

The debtor has the exclusive right to propose a plan for repayment to the bankruptcy court. No matter how many creditors may exist, they cannot force a plan upon the debtor. A Chapter Thirteen petition might include a repayment plan that lasts five years and lists wage earnings and the sale of a portion of the debtor's property as sources for the repayment. The plan, which is overseen by a bankruptcy trustee, must treat all creditors who have comparable claims equally. The repayment plan may entail paying off only a portion of each debt, which is called a composition; receiving extra time to pay the debts, called an extension; or both.

The debtor's plan can be approved only by the court, unlike a Chapter Eleven reorganization plan, which requires both acceptance by the creditors and confirmation by the court. After the debtor has completed payments pursuant to the plan, she is discharged from liability. A Chapter Thirteen plan does not, however, relieve a debtor from liability for alimony and child support, federal student loans, and taxes.

See: composition with creditors.