"Is Bankruptcy the End of the World?" "A Fresh Start" is a new blog series authored by Chad Miner, Esq., A discussion forum for bankruptcy and debt relief.

 A Fresh Start

           ♦ Is Bankruptcy the End of the World? 

            What is the first image that we think about when we hear the word bankruptcy?  Is it a distressed looking gentleman wearing a barrel?  Hopefully not, but nonetheless people who are facing insurmountable debt issues frequently have many questions about bankruptcy.  Is bankruptcy the end of the world?  Will it solve everything?  The answer to the first question is a definite no, and the answer to the second question is probably no, as well.  But before answering these questions, we should begin by defining what bankruptcy is and how it generally works.


           Bankruptcy is the legal process for obtaining relief from debts that cannot otherwise be dealt with.  There are primarily two types of bankruptcy applicable to individuals and married couples: Chapter 7 and Chapter 13.  Chapter 7, also referred to as a liquidation bankruptcy, is designed to simply clear away debts in exchange for the debtor’s surrender of all non-exempt assets.  We will discuss the concept of non-exempt assets in greater detail in future posts, but for now, suffice it to say that in most cases all of the debtor’s assets are exempt, so nothing has to be surrendered.  In contrast with a Chapter 7 bankruptcy, a Chapter 13 bankruptcy, also referred to as a wage earner’s plan, is designed to allow the debtor to pay off what he or she can of his or her debts over a three to five year period. 

One important note about both types of bankruptcy is that secured assets (such as a home with a mortgage on it or a car with a lien) must be dealt with in one way or another or they may be lost.  Options vary depending on the chapter under which the bankruptcy was brought and on the type of asset.  The reason why these assets may be lost has to do with the purpose of bankruptcy, which is to release debtors from personal liability on debts.  Essentially, this means that while a debtor who has gone through bankruptcy cannot be held personally liable in the event that he or she fails to pay off his or her home mortgage (as would be the case without the protection given by bankruptcy), the property itself may still be foreclosed upon.

            But, as to the first question -- Is bankruptcy the end of the world? -- the answer, again, is that bankruptcy is most definitely not the end of the world.  In fact, many successful and well-known folks have sought bankruptcy protection at one time or another.  The list goes on and on, but among some of the more famous are the likes of Henry Ford, Walt Disney, and Abraham Lincoln.  And, Ford once observed that “Failure is simply the opportunity to begin again, this time more intelligently.”

            And, as to the second question -- Will bankruptcy solve everything? -- the answer, here as well, is unfortunately probably no.  This question might even remind us a little bit of the boy who after having broken his arm asked his doctor if he would be able to play the violin after his arm healed, and who after the doctor replied in the affirmative happily informed his doctor how exciting that was, particularly given that he had not been able to play the violin before. 

            Quite simply it must always be remembered that bankruptcy is only effective within a fairly limited scope.  Again, the purpose of bankruptcy is to release the debtor from personal liability.  However, there are a number of things that bankruptcy does not accomplish.  First, as previously mentioned, it does not enable the debtor to keep property that is secured, unless the underlying debt is dealt with.  Second, there are various types of debt that bankruptcy will not protect a debtor from.  These include debts such as child support payments, many tax obligations, student loans (absent a showing of undue hardship), and several others.  And, third, while receiving the protections offered by bankruptcy may make life a little easier, bankruptcy is not a panacea.  Bankruptcy can only address what has happened in the past, but is powerless to protect the debtor from future decisions or misfortunes.  Oftentimes, this means that in addition to bankruptcy, it will be necessary for the debtor to make certain lifestyle changes to avoid ending up in the same spot again.

            Please join me next time for: Why You May Want to Consider Filing Under Chapter 7.