Underwater in Debt: How Bankruptcy Can Get You a Fresh Start

Bankruptcy. It's a word that is fraught with emotions including stress, anxiety and despair. However, there is another side to bankruptcy that is often overlooked and yet is the whole reason bankruptcy even exists. A 1934 Supreme Court decision explained it this way:

"It gives to the honest but unfortunate debtor a new opportunity in life and a clear field for future effort, unhampered by the pressure and discouragement of preexisting debt."

A Clear Field

How does bankruptcy offer the "honest but unfortunate debtor" who is underwater in debt the chance for a fresh start? Bankruptcy is a public, legal announcement that you have become unable to pay your existing debts and a solution for handling those debts.

There are two types of bankruptcy filings that are most common for individuals and couples. These are known by their location in the US Bankruptcy Code, Chapter 7 and Chapter 13. Ultimately both types of bankruptcy offer discharging (forgiving) the debt as their solution.

Chapter 7 vs. Chapter 13

Both types of bankruptcy are filed in Federal Bankruptcy Court, and both require extremely detailed information about your financial situation. Be prepared to list every debt you owe, all of your income sources, and all of your assets. An asset is anything that you own of value from a house to your wedding ring.

Chapter 7 is filed more often by people with high amounts of unsecured debt (such as credit card and medical bills) who don't have lots of assets to protect.
Chapter 7 is the "liquidation" bankruptcy where your assets are sold by a court Trustee to pay your debts
Some exemptions to what has to be sold are allowed under Chapter 7, but they are different for each state
Chapter 13 features a reorganization of your debt and repayment of a portion of the debt (negotiated in advance) over a period of 3-5 years
If you have an acceptable repayment plan, you may be able to keep your house and car under Chapter 13

You should be aware that not all debts that you owe may be discharged, or forgiven in bankruptcy and that any of your creditors have the right to file an "adversary proceeding" objecting to your proposed bankruptcy plan. Debts that ususally cannot be forgiven in either type of bankruptcy include:

Child or spousal support
Court ordered fees and fines, such as those levied as part of a DUI conviction
Taxes
Some types of student loans

Get Legal Help

Bankruptcy does stop the collection calls and it gives you the opportunity to step back, learn from your mistakes and take corrective action. It will be a negative mark on your credit report for up to 10 years. Only you can decide if it's right for you. Get advice from a local bankruptcy attorney who is willing to take the time to provide you with information and who can answer all of your questions about the process and how you might benefit.

Think Bankruptcy Might Be for You?