What Is Chapter 13?

• Chapter 13 bankruptcy, under federal law, is defined as a means of "reorganization." In court, you're required to file a plan of repayment to your debtors. The usual length of time for repayment is three to five years. Many people choose this option if they have a steady income but insufficient means to pay all their debts and cover their basic costs of living. Debt must be less than $269,750 in unsecured debt and $807,750 in secured debt.
  
  Common cases involve consumers who are behind in their home or auto loans and want to keep their exempt assets. Examples of federal exemptions include equity in your home, your car, household goods, even tools or books that are related to your job. An exemption is a way to keep what you have and work out a way to afford to keep your assets away from the credit hounds.
  
  

Pros and Cons of Chapter 13

• If you've fallen behind on your loans and are facing action, such as a repossession or foreclosure, you might want to look further into Chapter 13. This type of reorganization is attractive to consumers in financial trouble, since it allows people a financial fresh start, presenting a plan to pay off debt without harassment from credit collectors. Chapter 13 is also a way to protect your exempt assets (those you want to keep, such as your house and car), as well as an opportunity to pay off all your debts and rebuild your credit.
  
  The downside is you're filing for bankruptcy---this shouldn't be taken lightly. Filing can be expensive in its own right. You have to pay attorney's fees, filing fees and interest charges, the latter making up perhaps 20 percent of your repayment plan or more. Plus, filing for bankruptcy will appear on your permanent credit record, despite the fact that you're rebuilding credit.
  
  

Seek Other Alternatives First

• Before filing for Chapter 13 bankruptcy, you should always seek alternatives. Look into getting a second job or consolidating your debt with a home refinance plan or credit counseling plan. Contact your creditors and inform them of your intentions to file for an exemption under Chapter 13. If you're behind in your home or auto payments, your lending company will most likely work with you to reach a settlement before you go to bankruptcy court.
  
  If you're intent on paying down your debt, you should avoid bankruptcy. Think of Chapter 13 as a last resort and not as a get-out-of-jail-free card. Come up with a budget and a term of settlement, and stick with the plan. The reasons for getting into debt don't matter. Find your best option, whether that means finding a second job or seeking credit counseling, but exhaust all of your available options before turning to Chapter 13 bankruptcy.