As Americans face overwhelming financial problems due to the current state of the economy, many see bankruptcy as sword hanging over their head that is ready to drop at any moment. The whole concept of “bankruptcy” is a fearful thought for many as most have believe that this is a sign of failure and that they will lose everything they own.

It is because of the misconception of what bankruptcy is and how bankruptcy works that causes a lot of people to fall for other shady debt relief solutions like debt consolidation and debt settlement. For those that ended up in more debt than when they started by using these methods, bankruptcy might have saved them in the beginning.

If you have several thousands of dollars in debt and are having trouble paying your home, then bankruptcy might be the best option to save you from foreclosure. If you qualify for Chapter 13 bankruptcy, then you a given a certain amount of time to deal with your creditors while you catch up on your mortgage.

Before you call one of those dubious debt management services, look into the laws behind bankruptcy.

For those not familiar with bankruptcy, there are three main types and they are Chapter 13, Chapter 11 and Chapter 7 bankruptcy. Chapter 11 bankruptcy refers to businesses and Chapter 7 is a possible solution for those that do not qualify for Chapter 13.

One thing you have to know is that Chapter 13 bankruptcy is not for everyone. The main criteria are that you have to be working and have a stable income. If you don’t have a job or your income is not a regular amount each month that you can count on, you might not be able to file for this type of insolvency.

Other Chapter 13 bankruptcy information that is relevant for filing is that there is a maximum amount of money that you can owe and a maximum amount of value for your property.

It doesn’t matter if you are self-employed or if you run a family business, you still can be eligible for Chapter 13 relief. Your total unsecured debt has to be lower than $370,000 and your secured debt below a million dollars.

Another key point is that you must seek out credit counseling from an approved credit counseling agency by the United States Trustee’s office within 180 days before filing. They want to make sure that you have made an attempt to try to solve your credit issues before you choose this route.

You can find a list of approved agencies at www.usdoj.gov/ust.

Chapter 13 bankruptcy rules can be a little complicated especially when you get into discharge of the bankruptcy. Basically, it is a plan to help individuals who have a regular income develop a plan to repay all or part of their debt. When filing, a debtor will propose a repayment plan to the court to pay off creditors over a three to five year period. This period is decided based on the applicant’s current income compared against the state’s median income. If their income is below this median, they have three years and if it is above, then they have five years to pay off this debt. During this period, all creditors must stop any type of collection methods.

One of the advantages to filing for Chapter 13 bankruptcy is that it can stop foreclosure proceedings and can help with delinquent mortgage payments. Also during Chapter 13, it can extend the life of secured debt by rescheduling and lowering payments. During the period of bankruptcy, you know longer make payments to your creditors but directly to a trustee who disperses the money to your creditors.

Once bankruptcy has been granted, then the money is divided between three types of claims which are priority, secured and unsecured.

Priority claims must be paid in full and these consist of child support, tax debt and the costs of the bankruptcy proceedings.

Secured debt must also be paid during this time. Payments made for mortgages can continue past the terms of the bankruptcy as long as any arrearage is paid over this time.

Unsecured debt does not all need to be paid back. The amount is determined by certain factors that depend on the amount of disposable income and a model based on if the debtor’s assets were liquidated under Chapter 7 bankruptcy.

You begin this procedure by filing a petition for bankruptcy with the courts in your area. Filing Chapter 13 bankruptcy can be an involved process. You can do it yourself but it is always advisable to get a lawyer. In the local court, your filing must include a list of assets and liabilities, your current income and expenses, any property leases and a general statement of your current financial affairs. You also have to include a certification from the credit counseling, the debt repayment plan that you worked out and pay stubs and records of your current employment plus any other documents that they might request.

There is a filing fee which is usually around $235 plus an administrative fee. These fees are due upon filing but some states allow for a payment plan to be worked out but it is best to just pay this fee all at once.

You must also make a list of all creditors against you and you should get a copy of all three of credit bureaus so you can make an accurate list of debts.

The difference between Chapter 7 and Chapter 13 bankruptcy is in the manner in which the debt is resolved. With Chapter 13, you are allowed to keep property while you set up a payment plan to pay off your debts. This is sometimes called the wage earner’s plan because it allows those with a steady income to get out from under debt. Chapter 7 bankruptcy sets up no plan to pay back the debt and just liquidates all the debtor’s assets to pay off his creditors and allowing the debtor to start off with a clean slate.

Usually Chapter 7 is used as a last resort for those who aren’t eligible for Chapter 13 or Chapter 11 bankruptcy.

Bankruptcy is not the right option for everyone. Before making this decision, or any decision,, concerning your debt, get advice about debt solutions from a credit counseling agency that can advise you of the right path to take.

If you decide to try to file bankruptcy yourself, NOLO offers great books on DYI legal help, visit their website www.nolo.com.

Also, I have included a video about Chapter 13 bankruptcy below.