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Lucky 13? Chapter 13 bankruptcy pros and cons

You've spent and you are SPENT.

You know it's payback time, but you're struggling with a loss of income, your health or even your spouse. It's tough to recall a time when you didn't hold your breath as you sort through bills or wince as the phone rings (creditors, yet again).

Do you find yourself facing gut-wrenching choices -- car loan or mortgage? Medicine or meals? Water or electric? All too often these days, an examination of your financial options may be long past due.

Bankruptcy, with good reason, should be considered a last resort, but it may be the ticket to your ultimate destination: freedom. And head-pounding words like foreclosure, repossession and wage garnishment, along with a sense of wanting to do "what's right," are what lead people to Chapter 13 bankruptcy.

But it's the less popular of two choices for individuals. Of 1.675 million personal bankruptcies filed in 2003, about 1.2 million filed for Chapter 7 bankruptcy, in which the court discharges most debts immediately. Chapter 7, however, is costly, as all your assets are subject to liquidation. In other words, homeowners may no longer be homeowners.

The less popular Chapter 13, filed by nearly 475,000 people in 2003, involves the debtor and an attorney proposing a payment plan with whatever income is left over after necessary expenses. The court assigns a trustee to administer the plan over three to five years. "You are showing good faith because you're trying to repay part of your debt," says Nicole Lowe, credit education specialist at TrueCredit.com, a division of the credit bureau TransUnion, adding that there's no specific type of person with problems that lead to bankruptcy.

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"If we go down Chapter 13 -- door No. 2 -- we would choose it for the predominant reason that we have equity in our home [and] we don't want to sell," explains Cate Williams, vice president of financial literacy at Money Management International, a consumer credit counseling service. When there's just no place like home, debtors tend to choose Chapter 13.

First step
A financial fitness test is the first step toward a bankruptcy decision. "Have you really taken a look at your finances and created a household budget? Have you researched your ability to earn extra money through odds and ends or a second job?" asks Chris Viale, president and chief operating officer of Cambridge Credit Counseling Corp.

A lot of people wrongly see bankruptcy as something to assist in paying debtors, says Henry Hildebrand, an attorney and Chapter 13 Trustee in Middle Tennessee since 1982. Slick advertising makes it seem easy, points out Maxine Sweet, vice president of consumer affairs for the credit bureau Experian.

It's important to have "competent bankruptcy counsel advise you, both about the choices among chapters and about how best to make sure that bankruptcy operates to solve your financial difficulties, rather than just as a hiatus," explains Ted Janger, a 2004 scholar in residence at American Bankruptcy Institute.

Experts advise getting personal recommendations and seeking attorneys who have gone through the American Board of Certification program in bankruptcy law. Also, don't rely only on attorneys for help. "They understand the law but may not understand the credit ramifications as much," Sweet notes.

(continued on next page)

-- Posted: Sept. 20, 2004
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2004 Debt Guide
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