The Common Law

I have asked Marvin Sprouse, an associate with the law firm of Jackson Walker LLP, to be a guest columnist for today's bankruptcy topic. Marvin has worked as a bankruptcy attorney for five years. – Luke Ellis

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Personal Finances – Should I Consider Personal Bankruptcy?

I lived beyond my means for several years and accrued a massive amount of debt. I am now fiscally responsible and would like to repay the debt. But with my salary, I won't even be able to make a dent in all the money I owe. A friend suggested I consider filing for bankruptcy. Can you explain what bankruptcy would mean for me?

Most consumers are eligible for either Chapter 7 or Chapter 13 relief under the Bankruptcy Code. The designation for Chapter 7 or 13 is made upon the filing of a petition with the Bankruptcy Court. Upon filing the petition, an individual is referred to as a "debtor".

Chapter 7 is often called "liquidation" or "straight bankruptcy." In a Chapter 7 case, a trustee is appointed to supervise the liquidation, or sale, of the debtor's nonexempt assets. Exemptions are determined by state or federal law and are subject to certain limits. Home furnishings, clothes, and work tools are typically exempt. The debtor gets a "discharge," which releases them from personal liability for the discharged debt.

Chapter 13 is the "wage earner" chapter of the Bankruptcy Code; a debtor must have regular income to qualify. Under Chapter 13, a debtor proposes a plan to pay creditors "disposable income" over a period of time, usually three years. Chapter 13 generally allows a debtor to keep more of his or her property than Chapter 7. Upon the successful conclusion of the Chapter 13 plan, the debtor receives a discharge.

Under both chapters, many types of credit card debt are eligible for discharge. However, certain types of debt are not discharged, such as obligations for property subject to a valid lien or security interest, child support, and student loans.

Bankruptcy is designed to allow an honest debtor the opportunity to obtain a "fresh start." It's not the right choice for everyone, but it does provide a proven mechanism for an individual to regain control over personal finances.