Consumer bankruptcy: A guide

As popular as bankruptcy is today, it's nothing new, going at least all the way back to the Bible's Book of Deuteronomy, which simply states: "At the end of every seven years you must cancel debts."

If only it were that divinely simple.


All these centuries later, a bankruptcy filing still offers forgiveness for many debts, or at least provides a payment plan to make them more affordable. But rules and regulations can rain down on an applicant like a plague of frogs.

Here's a guide to consumer bankruptcy with answers for concerns such as: Who can apply? Will I need a lawyer? What debts can be eased? How will it affect my credit rating? And, perhaps most important of all during this foreclosure-cursed time, will I be able to keep my house?

Bankruptcy can be a highly effective tool for getting back on your financial feet. But it's a serious step with long-range consequences, and financial advisors generally say it should be considered only as a last resort.

Used unwisely, it can do more harm than good.

Keep in mind another, more sobering quote from Deuteronomy: "There will always be poor people in the land."

Several types of bankruptcy are available, but most consumers file under Chapter 7 or Chapter 13.

These two bankruptcy flavors are markedly different in how they work and in their outcomes.

Generally speaking, Chapter 7 is for people so mired in debt that there's little chance they'll ever be able to pay what they owe. If the filing comes to a successful conclusion, many of the most crippling debts -- including those owed to credit card companies -- could be erased and a fresh start begins.

However, that fresh start might be without car, home and other key possessions. Although much is protected in a Chapter 7 bankruptcy, the court trustee who oversees a filing has the right to seize some belongings and turn them into cash for creditors.

A Chapter 13 filing, sometimes called a wage-earner bankruptcy, is more complex. It's for people who can pay what they owe -- or at least some of it -- but need extra time to make good on the debts.

One of the main reasons to use a Chapter 13 filing is that it can stop a foreclosure. This type of bankruptcy demands not only a steady income but also the discipline to stick with a court-approved payment plan for several years. Attorney Stephen Elias, who has written several books on consumer bankruptcies, said that only about a third of Chapter 13 filings are seen through to completion.

No matter which type of bankruptcy is filed, Elias said, there's one common key to a successful outcome. Just as your mother taught you: Honesty is the best policy, and not just for moral reasons.

"The people that work in this field are very good at detecting an avoidance of the truth," he said.

If you're caught fudging the numbers or trying to hide property, a bankruptcy can be canceled, possibly leaving you in worse financial shape than when you filed.


"There's a much better chance of being caught at this than being caught cheating on your taxes," Elias said.