Most American consumers are living too close to the edge. They are carrying too much credit card and mortgage debt and have too little in the way of savings. When the inevitable unexpected crisis comes along, they have little left to handle it and quickly slip into a critical financial state.

According to many bankruptcy experts, most people file for bankruptcy due to life-changing experiences, such as a job loss, divorce or serious illness. Uninsured medical expenses are supposedly the cause of about 20% of bankruptcy filings. But excessive debt also plays a very large role.

If you are drowning in debt with little realistic hope of paying off your bills, bankruptcy is your only real option. Although far from pleasant, bankruptcy can be easier to handle than the constant pressure put on a debtor by lenders and collection agencies. You can immediately stop all harassment and legal actions, wipe out a good deal of your debt and get a new start on life.

The anomalies of credit scoring also work against debtors struggling to pay off debt. Your score will be low because of excessive use of debt and missed payments. You’re unlikely to get new credit and the interest rates on your credit cards might be raised to usurious levels. You are likely to have a better credit score and find it easier to get credit – very expensive credit - after bankruptcy than before.

Also the stigma and embarrassment that used to accompany bankruptcy has largely disappeared. To many, it has become just another financial planning tool.

The Bankruptcy Procedure

Bankruptcy courts are part of the Federal court system. The bankruptcy law itself is a Federal law, although the states can have their own laws, which govern such things as exemptions. Federal bankruptcy judges apply both the Federal and state laws in the jurisdiction where they sit. Debtors sometimes have a choice of which law should apply.

Bankruptcy proceedings are commenced by filing certain required forms and paying a fee. Filling automatically stays all legal proceedings against you as well as all debt collection actions. Fees can be paid in installments, but must be completely paid before the dischare will be granted.

A trustee will be appointed. His job is to review your financial affairs, collect and sell assets, if necessary, and distribute the proceeds to your creditors. If you are setting up a repayment plan, he will be responsible for seeing it implemented. He will even pursue your debtors to collect money owed you that can be used to pay off your creditors.

The trustee’s powers include the power to set aside preferential transfers made to creditors within 90 days before the filing of the bankruptcy petition, the power to undo security interests and other transfers of property

He also holds meetings which are attended by the debtor filing for bankruptcy and his creditors. This is probably the hardest part of the whole proceedure for most people.

The trustee will question the debtor about his financial affairs and go over his financial records to determine that all assets have been disclosed and that no fraud is being perpetrated on the court.

Attorneys for the creditors are also allowed to ask questions about your expenses and assets.

The trustee will also instruct you on other alternatives and lecture you on the proper use of credit.

He will then issue a report the bankruptcy judge will use in deciding whether to dicharge your debts and which debts are to be included.

A debtor is unlikely to ever meet the judge. In a Chapter 7 case, the debtor will not appear in court unless an objection is made. In a Chapter 13 case, the debtor might have to appear at a hearing approving his repayment plan.

Most of the work will be done in the trustee’s office.

What Debt Can Be Discharged?

Not all debt can be discharged by a bankruptcy court.

A bankrupcy court cannot discharge debts arising from alimony, child maintenance and support obligations; certain taxes (including the last three years income taxes); debts for educational benefit overpayments or federal student loans; debts for willful and malicious injury; debts for death or personal injury caused by the driving while intoxicated from alcohol or other substances; and debts from criminal restitution orders.

To the extent that these types of debts are not fully paid by the sale of assets during during a Chapter Seven case or not fully repaid during a Chapter Thirteen case, the debtor is still responsible for them after the bankruptcy case has been concluded.

Other debts may or may not be discharged. Debts for money or property obtained by false pretenses, through fraud, embezzlement or misuse of funds while acting as a fiduciary; debts for willful and malicious injury to another entity or to the property of another entity; and debts arising from a property settlement agreement incurred in connection wth a divorce or separation are discharged, unless a creditor convinces the court to have such debts declared exempt from discharge.

If you can't get at least half of your debts discharged, it's not worth the effort.

Chris Cooper is a retired attorney who has spent several periods of his life deep in debt. At http://www.credit-yourself.com he tries to pass on some of the knowledge he picked up in his journey to become debt free.

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• The 7 Secrets to Getting—and Staying—Out of Debt


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• Is There Any Way To Get Out Of Debt?


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