Chapter 13 bankruptcy, which applies to most individuals, involves reorganization of your debts. You'll need to file a proposal with the bankruptcy court detailing your plan for repayment and include a detailed budget, which could be challenged by the court if the judge, the trustee, or a creditor feels you've padded it with non-essentials. Some debts can be erased altogether, others must be partially repaid, and others must be repaid in full.

If your proposal is accepted, your wages will probably be garnished during the repayment period, which usually lasts three to five years. In Chapter 13 bankruptcy, you can prevent the loss of your home by immediately starting to make your regular mortgage payments and any catch-up payments required by your repayment plan.

How Much Will You Have to Pay?

You must pay all of your missed payments on secured debt, such as your house or car, if you want to keep the asset. In general, expect to devote all of your income after expenses to your required payments. The minimum amount you'll have to repay on your unsecured debt is the value of your nonexempt personal property.

Each state has its own laws for determining nonexempt property, but in general, you'll be given an “allowance” that consists of several thousand dollars for a car, part of the equity in your home, necessary clothing, necessary household goods and furniture, appliances, and personal effects. You'll have to repay at least an amount equal to the rest.

In other words, if you add up the equity in everything you own and deduct the amount of the exempt items, the difference is the least amount you'll owe. You'll have to pay more than this if you have nonexempt expenses such as child support or back taxes.

The courts have discretion regarding how much of your debts you'll have to repay. Some courts don't require you to pay anything on debts that you aren't legally required to repay in full (a list of these debts follows); others will want you to pay as much as possible

You may be responsible for a filing fee unless your income is low enough that you qualify for an exemption. You may also be required to pay several years of interest on the total value of your nonexempt property to compensate creditors for the fact that they have to wait several years to be fully paid.

Before you make the decision to file for bankruptcy, you should know which debts you may be able to walk away from and which you'll still be responsible for. Debts that can't be discharged or forgiven include:

• Child support and alimony

• Debts for personal injury or death caused by drunk driving

• Most student loans

• Traffic tickets and other fines or penalties imposed for breaking the law

• Certain types of taxes owed

• Debts you forget to list in your bankruptcy papers

Eligibility for Chapter 13

Because repayment of some of your debts is the basis for this type of bankruptcy, you have to have regular income in order to be eligible. Regular income can include social security benefits, child care or alimony, and rental income, and, of course, employment or self-employment wages. You also have to have enough disposable income after your basic needs such as housing, utilities, and food to use for debt repayment.

Bankruptcy is considered the debt management tool of last resort because it has serious consequences. Since it can stay in your credit history for ten years, it can affect your ability to obtain credit, a job, insurance, or housing.