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Lucky
13? Chapter 13 bankruptcy pros and cons
By Melissa
M. Ezarik • Bankrate.com 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.
"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
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