The goal of bankruptcy is to give the honest debtor a fresh start. Bankruptcy may be the only option for the person that is drowning in debt and can't get out of the debt by any of the other four debt management strategies. There are two forms of personal bankruptcy:

1. Chapter 7
2. Chapter 13

In a Chapter 7 bankruptcy some of your personal property is treated as exempt, meaning that your creditors can't use those assets to try and recover the money that you owe them. Some of your home equity, clothing, and some other assets will be treated as exempt. What is exempt will vary from state to state. Any property that is not exempt will be liquidated and the proceeds will be payed to your creditors under the supervision of the court. Because there is usually little or no nonexempt property in most chapter 7 cases, there may not be an actual liquidation of the debtor’s assets. In a chapter 7 bankruptcy there is an immediate discharge of debts.

A Chapter 13 bankruptcy may be the better option for the debtor who has some assets he or she wishes to keep that will not be treated as exempt. In this type of bankruptcy the debtor proposes a plan to repay creditors over a 3 to 5 year period of time. The repayment may actually end up being only a fraction of what was originally owed. The debtor is also given a chance to bring mortgages current, etc. In a chapter 13 bankruptcy there is not an immediate discharge of debts. The discharge of debts does not occur until you complete the repayment plan that you sign up for in your chapter 13 proposal. During your repayment plan you are protected from lawsuits over debt, wage garnishments, judgments and other creditor actions.

Under the new bankruptcy law, it is not as easy to get a chapter 7 bankruptcy. The court uses a means test to determine your eligibility for a chapter 7 versus a chapter 13. If you do not pass the means test, you will be denied a chapter 7 and required to file a chapter 13. A Chapter 13 bankruptcy is certainly no free lunch.