For individuals in the United States, there are two
basic forms of personal bankruptcy. Chapter 7 bankruptcy,
also known as a liquidation bankruptcy, discharges
your debts in a relatively short period of time.
On October 17, 2005, new federal bankruptcy law
in America requires anyone whose gross income is higher
than the median income for their state to file bankruptcy
under Chapter 13, instead of under Chapter
The Chapter 13 bankruptcy plan must run for
five years so that the unsecured creditors (such as
the credit card companies that lobbied heavily for
the new law) receive a certain level of repayment.
Because a Chapter 13 bankruptcy is paid for out of
the wages you earn each month, Chapter 13 is also
known as a Wage Earner Plan.
Should I file a Chapter 13 plan, or explore the
other bankruptcy alternatives?
The answer depends on your circumstances. If your
income is higher than the average income for your
state, you cannot file a Chapter 7 bankruptcy,
so that decision is made for you.
Since a Chapter 13 plan will typically last
for five years, you should explore any options that
can be completed in less than five years. For example,
if you can get a debt
consolidation loan and repay it in three years,
that is probably a better option for you than a five
year Chapter 13 plan.
If you want to avoid the court process, and can afford
to pay your debts in full over a three to five year
period, but don't qualify for a debt consolidation
loan, credit counseling
may be a preferable option.
Finally, you may be able to cut your expenses and
work it out yourself.
The court process is never fun, and you will want
an attorney's assistance, which will increase the
cost, so only choose a Chapter 13 plan if it is the
best option for you.