Significance

• Chapter 13 bankruptcy, which some call the "mini-reorganization," allows you some breathing room to recover from a temporary financial setback, such as illness, temporary loss of income or other financial mishap. You can keep your home and other assets. Once the court approves your plan, the agreement binds you and the creditors. Chapter 13 remains on your credit for seven years.
  
  

Function

• Typically, the people who file Chapter 13 earn a good wage, own a house and may have other assets. You enter into a court-approved repayment plan to pay an agreed amount to your creditors over a three- to five-year period. It represents the best option for many people behind on their mortgage payments. Chapter 13 allows individuals to work under the protection of the bankruptcy court to pay any arrears, which becomes part of the repayment plan.
  
  You must have the financial ability to make the current mortgage payments. Renegotiating other secured debt, and paying them over the course of the plan, often reduces the payment and helps to accelerate financial recovery.
  
  

Considerations

• You must prepare yourself to live on a strict budget for the period of the repayment plan. You must make the payments on time to keep your property. The plan does not allow you to accumulate new debt without the agreement of the trustee. This ensures you do not become burdened with obligations that interfere with your ability to make your payment and finish out the plan. You make your payments to the U.S. Bankruptcy Court Trustee. The trustee makes payment to the creditors. Your financial recovery depends on strictly adhering to the confirmed plan payment schedule. Another benefit: You no longer have direct contact with creditors.
  
  

Expert Insight

• The Waltzer Law Group, bankruptcy attorneys in the New York City area, writes on its website that Chapter 13 may help you rid yourself of a second mortgage on your home. The firm emphasizes that the process may be somewhat convoluted and requires a good bankruptcy attorney familiar with the workings of Chapter 13.
  
  

Warning

• You will still have the responsibility for the payment of a variety of other debts, including alimony, child support, guaranteed educational loan and benefit overpayments. Obligations incurred as the result of fraud, personal injury, death and other matters remain in place.