Personal Financial Planning: An "How-To" Guide (part 39)

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Renter's Insurance: Don't Move In Without It

by

Charles Lamson

If you live in an apartment (or some other type of rental unit), you should be aware that although the building you live in is very likely fully insured, your furnishings and other personal belongings are not. As a renter (or even the owner of a condominium unit), you need a special type of HO policy to obtain insurance coverage on your personal possessions.

Consider, for example, the predicament of Lois Weaver. She never got around to insuring her personal possessions in the apartment she rented in Denver. One wintry night, a water pipe ruptured, and escaping water damaged her furniture, rugs, and other belongings. When the building owner refused to pay for the loss, Ms. Weaver hauled him into court---and lost. Why did she lose her case? Simple: Unless a landlord can be proven negligent---and this one wasn't---he or she is not responsible for a tenant's property. The moral of this is very clear. Once you have accumulated personal belongings of value (from clothing and home furnishings to stereo equipment, TVs, computers, and DVD players), make sure they were adequately covered by insurance, even if you are only renting a place to live! Otherwise, you could risk losing everything you own.

Apparently many tenants do not realize this. Because surveys show most of them are without insurance---although renter's insurance is available at very reasonable rates. The policy, called Renter's Form HO-4 is a scaled down version of homeowner's insurance; it covers the contents of a house, apartment, or cooperative unit, but not the structure itself. Owners of condominium units need form need Form HO-6; it is similar but includes a minimum of $1,000 in protection for any building alterations, additions, and decorations paid for by the policyholder. Like regular homeowner's insurance, HO-4 and HO-6 policies include liability coverage and protect you at home and away. For example, if somebody is injured and sues you the policy would pay for damages up to a specified limit, generally $100,000, although some insurers go as high as $500,000.

A standard renter's insurance policy covers furniture, carpets, appliances, clothing and most other personal items, for their cash value at the time of loss. Expect to pay around $200 to $250 a year for about $15,000 in coverage, depending on where you live. For maximum protection, you can buy replacement-cost insurance, which pays the actual cost of replacing articles with comparable ones, though some policies limit the payout to four times the cash value. You will pay more for this---perhaps as little as another 10 percent---perhaps much more, depending on the insurer. Also the standard renter's policy provides limited coverage of such valuables as jewelry, furs, and silverware. Coverage varies, although some insurers pay up to $1,000 for the loss of watches, gems, and furs. and up to $2,500 for silverware. For larger amounts, you need an endorsement or a separate policy, called a PPF.

Renter's insurance pays for losses caused by fire or lightening, explosion, windstorms, hail, theft, civil commotion, aircraft, vehicles, smoke, vandalism and malicious mischief, falling objects, building collapse, and the weight of ice and snow. Certain damages caused by water, steam, electricity, appliances, and frozen pipes are covered as well. Plus, if your resident cannot be occupied because of damage from any of those perils, the insurer will pay for any increase in living expenses resulting from staying at a hotel and eating in restaurants. The liability coverage also pays for damages and legal costs arising from injuries or damage caused by you, a member of your family, or a pet, on or off your premises.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 403-404*

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Personal Financial Planning: An ""How-To" Guide (part 38)

BASIC PRINCIPLES OF PROPERTY INSURANCE

by

Charles Lamson

Suppose that a severe storm destroyed your home. Could you afford to replace it? Most people could not. To protect yourself from this and other similar types of property loss, you need property insurance. In addition, every day you face some type of risk of negligence. For example, you might be distraught over a personal problem and unintentionally run a red light, seriously injuring a pedestrian. Could you pay for medical costs? Because consequences like this and other potentially negligent acts could cause financial ruin, appropriate liability insurance is essential.

Accordingly, property and liability insurance should be as much a part of your personal financial plans as life and health insurance. Such coverage protects the assets you have already acquired and safeguards your progress towards your financial goals. Property insurance guards against catastrophic losses of real and personal property caused by such perils as fire, theft, vandalism, windstorms, and other calamities. Liability insurance offers protection against the financial consequences that may arise from the insured's responsibility for property loss or injuries to others.

People spend a lot of money for insurance coverage, but few really understand what they are getting for their premium dollars. Even worse, the vast majority of people are totally unaware of any gaps, overinsurance, or underinsurance in their property and liability insurance policies. Inefficient or inadequate insurance protection is at odds with the objectives of personal financial planning, so it is important to become familiar with the principles of property and liability insurance.

The basic principles of property and liability insurance pertain to types of exposure, the principle of indemnity, and coinsurance. Each of these principles is discussed in the following sections.

Types of Exposure

Most individuals face two basic types of exposure: physical loss of property and loss through liability.

Exposure to Property Loss

The vast majority of property insurance contracts define the property covered and name the perils---the causes of loss---for which the insured will be compensated in the event of a claim against their policy. As a rule, most property insurance contracts impose two obligations on the property owner: (1) developing a complete inventory of the property being insured and (2) identifying the perils against which protection is desired. Some property contracts limit coverage by excluding certain types of property and perils, while others offer protection on a more comprehensive basis.

Property Inventory

Do you know the value of all the property you own? If you are like most people, you do not, nor do you have an itemized property list for insurance purposes. This is especially important in the case of a total loss---if your home is burned by fire, for example. All property insurance companies require you to show proof of loss when making a claim, and your personal property inventory, along with corresponding values at the time of inventory, can serve as evidence to satisfy the company. A comprehensive property inventory will not only help you settle a claim when a loss occurs, but it also serves as a useful guide for selecting the most appropriate coverage for your particular needs.

Most families have a home, household furnishings, clothing and personal belongings, lawn and garden equipment, and motor vehicles, all of which need to be insured. Fortunately, most homeowners and automobile insurance policies provide coverage for these types of belongings. But many families also own such items as motorboats and trailers, various types of off-road vehicles, business property and inventories, jewelry, stamp or coin collections, furs, musical instruments, antiques, paintings, bonds, securities, and other items of special value, such as cameras, golf clubs, electronic equipment, and personal computers. Coverage for these belongings (and those that accompany you when you travel) often require special types of insurance.

To help policyholders prepare inventories, many insurance companies have easy-to-complete personal property inventory forms available. These inventory forms can be supplemeted with photographs or videos of household contents and belongings. For insurance purposes, a picture may truly be worth a thousand words. Regardless of whether inventory forms are supplemented with photographs or videotapes, every effort should be made to keep those docements in a safe place, where they cannot be destroyed---such as a bank safe-deposit box. You might also consider keeping a duplicate copy with a parent or trusted relative. Remember, you may need these photographs and inventories if something serious does happen and you have to come up with an authenticated list of property losses.

Identifying Perils

Many people feel a false sense of security after buying insurance because they believe they are safeguarded against all contingencies. The fact is, however, that certain perils cannot be reasonably insured. For example, most homeowners or automobile insurance policies limit or exclude damage or loss caused by flood, earthquake, mudslides, mysterious disappearance, war, nuclear radiation, and wear and tear. In addition, property insurance contracts routinely limit coverage on the basis of location of the property, time of loss, persons involved, and the types of hazards to which the property is exposed.

Liability Exposures

We all encounter a variety of liability exposures daily. Driving a car, entertaining guests at home, or being careless in performing professional duties are some of the more common liability risks. Loss exposures that result from these activities are examples of negligence---the failure to act in a reasonable manner or take necessary steps to protect others from harm. However, even if you are never negligent and always prudent, someone might think you are the cause of a loss and bring a costly lawsuit against you. The judgment could cost you thousands---or even millions---of dollars. A debt that size could force you into bankruptcy or financial ruin.

Fortunately, liability insurance coverage will protect you against losses resulting from these risks, including the high legal fees required to defend yourself against suits that may, or may not, have merit. It is important to include adequate liability insurance in your overall insurance program, either through your homeowner's and automobile policies or through a separate umbrella policy.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 396-397*

end

Personal Financial Planning: An "How-To" Guide (part 37)

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Long-Term Care Health Insurance Provisions and Costs

by

Charles Lamson

Whether you purchase long-term care insurance as an individual or through an employer-sponsored plan, it is important to understand what you are buying. Substantial variation exists between products, so you must be especially careful to evaluate the provisions of each policy. Policy provisions are important factors in determining the premium for each policy. Let's take a closer look at the most important policy provisions to consider in purchasing long-term care insurance:

• Type of Care. Some long-term care policies offer benefits only for nursing home care, whereas others pay only for services in the insured's home, such as skilled or unskilled nursing care, physical therapy, homemakers, and home health aides. Because you cannot easily predict whether a person might need to be in a nursing home, most financial planners recommend policies that cover both. Many of these policies focus on nursing home care, and any expenses for healthcare in the insured's home are covered in a rider (a provision of an insurance policy that adds to or amends the coverage or terms) to the basic policy. Many policies also cover assisted-living, adult daycare and other community-care programs, alternative care, and respite care for the caregiver.
• Eligibility Requirements. Some very important provisions determine whether the insured will receive payment for claims. These are known as gatekeeper provisions. The most liberal policies state that the insured will qualify for benefits as long as his or her physician orders the care. A common and much more restrictive provision pays only for long-term care that is medically necessary due to sickness or injury.
• One common gatekeeper provision requires the insured's inability to perform a given number of activities of daily living (ADLs), such as bathing, dressing, or eating. Some policies also provide care for cognitive impairment or when medically necessary and prescribed by the patient's physician. In the case of an Alzheimer's patient who remains physically healthy, inclusion of cognitive abilities as ADLs would be extremely important. Newer policies no longer require a certain period of nursing home care before covering home healthcare services.
• Services Covered. Most policies today cover several levels of service in state-licensed nursing homes; specifically skilled, intermediate and custodial care. Skilled care is needed when a patient requires constant attention from a medical professional, such as a physician or registered nurse. Intermediate care is provided when the patient needs medical attention or supervision but not the constant attention of a medical professional. Custodial care  provides assistance in the normal activities of daily living, but no medical attention or supervision; a physician or nurse may be on call, however. Most long-term care policies also cover home care services, such as skilled or unskilled nursing care, physical therapy, homemakers, and home health aides provided by state-licensed or Medicare-certified home health agencies. Newer policies no longer require a certain period of nursing home care before covering home healthcare services.

• Daily Benefits. Long-term care policies reimburse the insured for services incurred up to a daily maximum. For nursing home care policies, the daily maximums generally range from $50 to $300, depending on the amount of premium the insured is willing to pay. For combination nursing home and home care policies, the maximum home care benefit is normally half the nursing home maximum.
• Benefit Duration. The maximum duration of benefits ranges from 1 year to the insured's lifetime. Lifetime coverage is very expensive, however. The consumer should realize that the average stay in a nursing home is now about 2.5 years (2005). Most financial planners recommend the purchase of a policy with a duration of 3 to 6 years to provide the insured with protection for a longer-than-average period of care.
• Waiting Period. Even if the insured meets the eligibility requirements of his or her policy, he or she must pay long-term care expenses during the waiting or elimination, period. Typical waiting periods are 90 to 100 days. Although premiums are much lower for policies with longer waiting periods, the insured must have liquid assets to cover his or her expenses during that period. If the insured is still receiving care after the waiting period expires, he or she will begin to receive benefits for the duration of the policy as long as its eligibility requirements continue to be met.
• Renewability. Most long-term care insurance policies now contain a guaranteed renewability provision to insure continued coverage for your lifetime as long as you continue to pay the premiums. This clause does not ensure a level premium over time, however. Nearly all policies allow the insurer to raise premiums if the claims experience for your peer group of policyholders is unfavorable. Watch out for policies with an optional renewability clause. These policies are renewable only at the option of the insurer.
• Preexisting conditions. Many policies include a preexisting conditions clause, ranging from 6 to 12 months. On the other hand, many policies have no such clause, which effectively eliminates one important source of possible claim disputes.
• Inflation Protection. Many policies offer riders that, for an additional premium, allow you to increase your benefits over time so that benefits roughly match the rising cost of nursing home and home healthcare. Most inflation protection riders allow you to increase benefits by a flat amount, often 5 percent, per year. 

• Premium Levels. Long-term care insurance is expensive, and premiums vary widely among insurance companies. For example, a healthy 65 year-old may pay about $2,000 per year for a policy that pays for 4 years' care at $100 per day for nursing home care and $50 per day for home care, with a 100-day waiting period and a 5 percent inflation rider. The same coverage may cost a 50 year-old $850 per year, and a 79 year-old, $5,900 per year. Because of this marked rise in premium with age, some financial planners recommend buying long-term care insurance when you are fairly young.

smart sites Confused about long-term care insurance coverage? The Guide to Long-Term Health Care at the Health Insurance Association of America site, www.hiaa.org, will provide the answers.

*SOURCE:PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 380-383*

end

smart sites

Confused about long-term care insurance
coverage? The Guide to Long-Term Health
Care at the Health Insurance Association of
America site, www.hiaa.org, will provide the
answers.

Personal Financial Planning: An "How-To" Guide (part 36)

How To Choose a Health Insurance Plan

by

Charles Lamson

You must choose one or more plans to provide coverage for you and your dependents. If you are employed, first review the various health insurance plans your company offers. If you can't get coverage from an employer, get plan descriptions and policy costs from several providers, including a group plan from a professional or trade organization. Then take your time and carefully read the plan materials to understand exactly what is covered, and at what cost. Next, add up what you have spent on medical costs over the past few years and what you might expect to spend in the future, so you can see what your costs would be under various plans.

How do you find health insurance if you have just graduated from college, don't yet have a job, and can no longer be covered by your parents' policy? Or maybe you are between jobs or need time to search out the best policy but do not want to be without protection.

You will have to ask yourself some difficult questions to decide whether you want an indemnity or a managed care plan, and then to choose the particular plan:

• How important is cost compared with having freedom of choice? You may have to pay more to stay with your current doctor if he or she is not part of a managed care plan you are considering. Also, you have to decide if you can live with the managed care plan's approach to healthcare.
• Will you be reimbursed if you choose a managed care plan and want to see an out of network provider? For most people, the managed care route is cheaper, even if you visit a doctor only once a year, because of indemnity plan "reasonable charge" provisions.
• What type of coverage do you need? Everyone has different needs; one person may want a plan with good maternity and pediatric care, whereas another wants outpatient mental health benefits. Make sure the plans you consider offer what you want.
• How good is the managed care network? Look at the participating doctors and hospitals to see how many of your providers are part of the plan. Check out the credentials of participating providers; a good sign is accreditation from the National Committee for Quality Assurance (NCQA). Are the providers' locations convenient for you? What preventive medical programs does it provide? Has membership grown? Talk to friends and associates to see what their experiences have been with the plan.
• How old are you and how is your health? Many financial advisors recommend buying the lowest-cost plan---which may be an indemnity plan with a high deductible---if you are young and healthy.

Once you have considered all of the coverage and resources that are available to you, consider where gaps in your health insurance coverage potentially lie and how best to fill them. Doing this requires an understanding of the features, policy provisions, and coverage provided by various insurance carriers and policies.

smart.sites What grade did your health plan get on its quality “report card” this year? The National Committee on Quality Assurance (NCQA) can tell you: www.ncqa.org.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 370-371*

end

smart.sites

What grade did your health plan get on its quality “report card” this
year? The National Committee on Quality Assurance (NCQA) can
tell you: www.ncqa.org.

Personal Financial Planning: An "How-To" Guide (part 35)

How To Select a Life Insurance Company

by

Charles Lamson

Selecting a life insurance company is an important part of shopping for life insurance. In addition to looking for a firm that provides reasonably priced products, attractive contract features, and good customer service, it is vital to consider the financial health of any insurance firm before buying a life insurance policy. You want to be certain that the company will be around and have the assets to pay your beneficiaries should you die. Even before you die, however, the financial stability of your insurance company is important. If the company fails, you may be forced to buy a new policy at less-favorable rates.

To narrow your choices, age and size are useful indicators. Unless a good reason exists to do otherwise, you should probably limit the companies you consider to those that have been doing business for 25 years or more and that have annual premium value in excess of $50 million. Although these criteria will root out a lot of smaller firms, there will be plenty of companies left from which to choose. You may also find that one company is preferable for your term protection and another for your whole life needs.

Factors to consider before making the final choice include the firm's reputation, financial history, commissions and other fees, and the specifics of their policy provisions. If you are choosing a company for a cash value life insurance policy, the company's investment performance and dividend history is also an important consideration and dividend history is also an important consideration.

How do you find all of this information? Luckily, private rating agencies have done much of the work for you. These agencies use publicly available financial data from insurance companies to analyze their debt structure, pricing practices, and management strategies in an effort to assess their financial stability. The purpose is to evaluate the insurance company's ability to pay future claims made by policyholders, known as claims paying ability. In most cases, insurance firms pay ratings agencies a fee for this rating service. The ratings agencies then give each insurance firm a "grade" based on their analysis of the firm's financial data.

The three biggest rating agencies include A.M. Best Company, Moody's Investor Service, and Standard & Poor's Corporation (S&P). Two smaller, but growing, rating agencies are Fitch Inc. and Weis Ratings, Inc. Weiss does not charge a fee to the insurance firms it examines. Exhibit 1 provides detailed contact information for each of the major rating agencies, including their Internet addresses. Basic rating information is usually free of charge at these sites. You can also usually find these ratings on the insurance company's Web site, or you can ask your agent how the company is rated by Best's, Moody's, and S&P.

Click to enlarge.

Each rating agency uses its own grading system. When looking at these ratings, however, keep several things in mind. With the exception of Moody's and Weiss, the ratings agencies will not publish a firm's rating if the insurer requests that it be withheld. Obviously, an insurance firm receiving a low rating is more likely to suppress publication, something that should be viewed as a clear signal that it is an insurance company to avoid. Also, remember that a high rating does not insure lasting financial stability. Even highly rated insurance firms can quickly encounter financial difficulties. In fact, in a recent report A.M. Best noted that fewer life insurers are receiving top ratings. It is a good idea, therefore, to check the ratings of your insurance carrier periodically even after you have purchased a policy.

Most experts agree that it is wise to purchase life insurance only from insurance companies that are assigned ratings by at least two of the major rating agencies and are consistently rated in the top two or three categories (say, Aaa, Aa1, or Aa2 by Moody's) by each of the major agencies from which they received ratings.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 345-346*

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Personal Financial Planning: An "How-To" Guide (part 34)

WHY BUY LIFE INSURANCE?

by

Charles Lamson

Life insurance planning is an important part of every successful financial plan. Its primary purpose is to protect your dependents from financial loss in the event of your untimely death. In essence, it provides an umbrella of protection for your loved ones by protecting the assets you've built up during your life and providing funds to help your family reach important financial goals even after you die.

Benefits of Life Insurance

In spite of its importance to sound financial planning, many people put off the decision to buy life insurance, in part because life insurance is associated with something unpleasant in many people's minds---namely, death. People do not like to talk about death or the things closely associated with it, so they often put off considering their life insurance needs. Life insurance is also intangible. You cannot see, smell, taste, or touch its benefits---and those benefits mainly happen after you have died. However, life insurance does have very important benefits that should not be ignored in the financial planning process.

The benefits of life insurance include:

• Financial Protection for Dependents: If you have family or loved ones who depend on your income, what would happen to them after you die? Would they be able to maintain their current lifestyle, stay in your home, or afford a college education? Life insurance provides a financial cushion for your dependents, giving them a set amount of money after your death that they can use for many different purposes. For example, your spouse may use your life insurance proceeds to pay off the mortgage on your home so your family can continue to live there comfortably or set aside funds for your child's college education. In, short, the most important benefit of life insurance is providing financial protection for your dependents after your death.
• Protection from Creditors: A life insurance policy can be structured so that death benefits are paid directly to a named beneficiary rather than being considered as part of your estate. This means that even if you have outstanding bills and debts at the time of your death, creditors cannot claim the cash benefits from your life insurance policy, providing further financial protection for your dependents.
• Tax Benefits: Life insurance proceeds paid to your heirs, as a rule, are not subject to state or federal income taxes. Further, if certain requirements are met, policy proceeds can pass to named beneficiaries free of any estate taxes.
• Vehicle for Savings: Some types of life insurance policies can serve as a savings vehicle, particularly for those who are looking for safety of principal. In particular, variable life policies are more investment vehicles than they are life insurance products. However, do not assume that all life insurance products can be considered savings instruments. The comparison is often inappropriate.

Just like other aspects of personal financial planning, life insurance decisions can be made easier by following a step-by-step approach to answer the following questions:

1. Do you need life insurance?
2. If so, how much life insurance do you need?
3. Which type of life insurance is best given your financial objectives?
4. What factors should be considered in making the final purchase decision?

Do You Need Life Insurance?

The first question to ask when considering the purchase of life insurance is if, in fact, you need it. Not everyone does. Many factors, including your personal situation and other financial resources, play a role in determining your need for life insurance. Remember, the major purpose of life insurance is to provide financial security for your dependents in the event of your death. Life insurance can also provide other benefits but they are all a distant second to this primary reason for buying life insurance.

Who needs life insurance? In general, life insurance should be considered if you have dependents counting on you for financial support. Therefore, a single adult who does not have children or other relatives to support may not need life insurance at all. Children also usually do not require insurance on their life.

Once you marry, your life insurance requirements should be reevaluated, depending on your spouse's earning potential and assets---such as a house---that you want to protect. The need for life insurance increases the most when children enter the picture, because young families stand to suffer the greatest financial hardship from the premature death of a parent. Even a non-wage-earning parent may require some life insurance to assure that children will be adequately cared for if the parent died.

As families build assets, their life insurance requirements continue to change, both in terms of the amount of insurance needed and the type of policy necessary to meet their financial objectives and protect their assets. Other life changes will also affect your life insurance needs. For example, if you divorce or your spouse dies, you may require additional life insurance to protect your children. In contrast, once your children finish school and are on their own, the need for life insurance may drop. In later years, life insurance needs vary depending on the availability of other financial resources, such as pensions and investments, to provide for your dependents.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005,  LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 322-323*

end

Personal Financial Planning :An "How-To" Guide (part 33)

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Bankruptcy: Paying the Ultimate Price for Credit Abuse

by

Charles Lamson

It certainly would not be an overstatement to say that during the 1980s and 1990s, debt was in! In fact, the explosion of debt that has occurred since 1980 is almost incomprehensible. The national debt rose from less than a trillion dollars when the 1980s began to about $21.6 trillion on October 28, 2018. Businesses also took on debt at a rapid pace. And not to be outdone, consumers were using credit like there was no tomorrow. So it should not be too surprising that when you couple the heavy debt load with a serious economic recession (like the one we had in 1990 to 1991) and a very slow economic recovery (from 1992 to 1993), you have all the ingredients of a real financial crisis. And that is what happened, as personal bankruptcies soared---indeed, nearly a million people a year filled for personal bankruptcy during that period. Even during the strong economic expansion from 1994 to 1997, the number of bankruptcies continued to climb.

When too many people are too heavily in debt, a recession (or some other economic reversal) can come along and push many of them over the edge. But let's face it, the recession is not the main culprit here, because the only way a recession can push you over the edge is if you are already sitting on it! The real culprit is excess debt. Some people simply abuse credit by taking on more than they can afford. Maybe they are pursuing a lifestyle beyond their means, or an unfortunate event---like the loss of a job---takes place.

Whatever the cause, sooner or later, they start missing payments and their credit rating begins to deteriorate. Unless some corrective actions are taken, this is followed by repossession of property, and eventually, even bankruptcy. these people basically have reached the end of a long line of deteriorating financial affairs. Households that cannot resolve serious credit problems on their own need help from the courts. Two legal remedies that are widely used under such circumstances include (1) the Wage Earner Plan and (2) straight bankruptcy.

Wage Earner Plan

The Wage Earner Plan (as defined in Chapter 13 of the U.S. Bankruptcy Code) is a workout procedure that involves some type of debt restructuring---usually by establishing a debt repayment schedule that is more compatible to the person's income. It may be a viable alternative for someone who has a steady source of income not more than $750,000 in secured debt and $250,000 in unsecured debt and a reasonably good chance of being able to repay the debts in  3 to 5 years. A majority of creditors must agree to the plan, and interest charges, along with late payment penalties, are waived for the repayment period. Creditors usually will go along with this plan because they stand to lose more in a straight bankruptcy. After the plan is approved, the individual makes periodic payments to the court, which then pays off the creditors. Throughout the process, the individual retains the use of, and keeps title to, all of his or her assets. Chapter 13 filings account for less than 30 percent of all personal bankruptcies.

Straight Bankruptcy

Straight bankruptcy, which is allowed under Chapter 7  of the bankruptcy code, can be viewed as a legal procedure that results in "wiping the slate clean and start anew." About 70 percent of those filing personal bankruptcy choose this route. However, state bankruptcy does not eliminate all the debtor's obligation, nor does the debtor necessarily lose all of his or her assets. For example, the debtor must make certain tax payments and  keep up alimony and child-support payments but is allowed to retain certain payments from Social Security, retirement, veterans', and disability benefits. In addition, the debtor may retain the equity in a home (up to $17,425), a car (up to $2,775), and other personal assets, such as clothing, books, and tools of his or her trade. These are minimums as established by federal regulation; generally, state laws are much more generous with regard to the amount the debtor is allowed to keep. The choice of federal or state regulations would depend on the debtor's assets.

Other Bankruptcy Options

Although most individual bankruptcies involve either straight liquidations or Wage Earner Plans, several other options have been added recently. To begin with, the U.S. Supreme Court ruled that individuals could now file for reorganization under Chapter 11 of the bankruptcy code---a type of bankruptcy that had been previously reserved mostly for businesses. Chapter 11 bankruptcy is for individuals who do not qualify for Chapter 13 reorganization---either because they exceed the debt limitations or do not have a regular source of income---but who want to try to restructure their debt. For these people, Chapter 11 is really the only alternative to straight bankruptcy. Like the Wage Earner Plan discussed above. Chapter 11 filers can restructure their debts, or a portion of them to be repaid over time. The big difference is that in Chapter 11 bankruptcies, the creditors vote on---and can possibly block---the restructuring plan. This, of course, means the reorganization process can drag on for years and and involve hefty legal fees, which probably explains why Chapter 11 is used in only about 1 percent of all personal bankruptcies.

The second alternative now available is a so-called Chapter 20 bankruptcy---it is labeled as such because it combines parts of both Chapters 7 and 13. Although not actually a part of the bankruptcy code, the procedure allows individuals to wipe out their unsecured debt as per Chapter 7, and then use Chapter 13 to restructure their secured debt, including mortgages, home equity loans, and nondischargeable debts, such as certain tax and child support payments.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005,  LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 265-267*

end