Chapter 13 bankruptcy is a reorganization plan for individuals wherein you pay some debts and discharge others over 5 years through a bankruptcy plan. It is designed for people who have assets they cannot exempt, people who owe taxes that cannot be discharged in a Chapter 7, and people who make too much money to qualify for a Chapter 7. Unlike a Chapter 7, your assets are not risk.
The amount you pay is based on your income (pursuant to a formula based on IRS guidelines), your non-exempt equity (i.e., the amount you would have paid to a Chapter 7 trustee), and the type of debts (e.g., mortgage arrears, car loans, certain types of taxes). At the end of 5 years, you obtain a discharge of the same debts as you would in a Chapter 7. You are also protected by the automatic stay.
The benefits of Chapter 13 include the ability to pay back tax debts without interest and penalties accruing, restructuring vehicle loans, eliminating interest on unsecured debts, and the ability to cure mortgage arrears. You also typically qualify for mortgage loans one year into your reorganization plan, so we often have clients eligible to buy a house while in bankruptcy. A Chapter 13 bankruptcy stays on your credit for 7 years and some lenders view this type of bankruptcy more favorably because you are paying some of your debts back.