Getting Out from Under Debt: Understanding Bankruptcy

by Judith Croteau

Facing the prospect of student loans and an unsure economic future, many students are unaware of procedures that can help them ease the burden of debt. This article explores some options for declaring bankruptcy.

In this economy, it is very easy to fall behind on a few payments, particularly if you are a returning student with life experience and the bills to go with it. Many are just a paycheck away from economic failure. The physical and emotional suffering from the stress of trying, and bill collectors bugging can be the last push over the edge. Something like an unexpected car expense or an astronomical medical bill can be the “straw that breaks the camel’s back.” For all these problems, bankruptcy can be a viable answer.

Let’s begin with Chapter 7 bankruptcy, liquidation. For the person who has no income and is overwhelmed by bills, this recourse is a real solution. Though it may aim a few kicks at your self-esteem and pride, it means getting out from under debt and earning a second chance. While it is true that you must list everything you owe, and that you may be required to turn it over to a court bankruptcy trustee, it does not mean you are put out on the street in the clothes on your back. There are exemptions, created with the goal of protecting the basic life needs and opportunity to continue. Your home and vehicle (if not unreasonably extravagant), your clothes and personal items including some jewelry, your household furnishings and appliances, your life insurance, the tools of your trade (how you can make an income), even medical equipment are all safe under the exemptions.

Yes, there are a lot of forms to fill out, and you really need a bankruptcy lawyer to help you get through the system. But as soon as you file, the collectors can no longer harass you and at a later date, a judge will go over everything. If the judge feels like you cannot possibly pay these debts and that you did not deliberately set out to create this debt, he will discharge your bankruptcy and you are no longer responsible for these debts. It is important to note that some bills (claims) are not dischargeable, including back taxes for the previous two years, money borrowed to pay taxes, domestic-support obligations, government fines, and student loans. You also take a ding on your credit report for seven years. You must weigh this action against your debt issues before taking any steps.

New laws in the last 15 years have opened the doors for the Chapter 13 bankruptcy, the wage earner or individual’s repayment plan. Created for people with a reasonable income to forestall creditors, this is a repayment plan option for the private individual who is ultimately able to pay his/her debtors if given a bit more time. The forms are filed along with a repayment plan based over 3 or 5 years. Upon acceptance and confirmation, at the end of the plan, any balances owed are cleared and the debtor is no longer responsible for remaining debt. This option can help individuals to retain property that would otherwise be liquidated, re-earn a marginally better credit rating, gain relief from harassing creditors, and ultimately fulfill many obligations.

With many forms, plans, meetings, the removal of privacy, the loss of control of your money and earnings, a long-term impact on credit rating, the emotional impact, and the kick to the ego, bankruptcy is not made to be easy. It is, however, created to offer relief in catastrophic circumstances and a better economic position for the future. No one should make this decision lightly. But, as students following a dream, the choice between starting out overwhelmed or choosing a clear path can make all the difference.