Legal process that is available for an individual who is overextended financially and is unable to pay his debts. The individual can file for bankruptcy in order to seek to legally eliminate some or all of his debts. Under Chapter 7 of the Bankruptcy Law, often called straight bankruptcy, the intent is to liquidate assets to pay the debts. Should this method be elected, the bankrupt can claim certain property as "exempt" and this property can be retained to preserve the basic necessities of life (such as a certain amount of equity in the home, economical car, and personal clothing and effects). Once a person has declared bankruptcy, he cannot be discharged from debts again for six years. Note: The new bankruptcy legislation, in effect in the fall of 2005, however, would make it difficult to file for Chapter 7 if their income is greater than the median for their state. As a result, more individuals are expected to file for Chapter 13.
Under Chapter 13, often called wage-earner plans, the assets are not liquidated. Instead, interest and late charges are eliminated and arrangements are made to pay off some or all of the debts over several years. Note that bankruptcy will not discharge all the debts. Debts that cannot be eliminated through bankruptcy proceedings include income taxes, child support, alimony, student loans, and debts incurred under false pretenses. Bankruptcy should not be taken lightly. One should be sure to consult an attorney on various decisions surrounding the issue and on how to get the greatest benefit from the new financial start. See also Bankruptcy (Business).
